Cost Changes, Demand Changes and Price Changes

This chapter seeks to answer (if only provisionally) a number of questions thrown up by the earlier discussion. In Chapter 2 we drew a sharp distinction between price-taking theories in which the level of excess demand was a key factor in determining price changes and price-making theories in which changes in the level of demand and in costs were amongst the key factors. In Chapter 3 we reviewed and presented evidence on the excess demand approach. In this chapter, we seek answers to the questions of whether changes in demand do, in practice, influence price changes and the quantitative importance of any such influences, and of the effect of cost changes on price changes. For this latter question we wish to investigate the quantitative importance of different types of costs (e.g. labour costs relative to material input costs), and the length of lags between cost changes and price changes.1 Another question is that of the influence of industrial structure (particularly concentration) on the process of price change. Under this head, we would wish to look at questions of the influence of industrial structure on price flexibility, as well as on the effects of cost and demand changes on price changes. We can also to some extent pursue the question of whether industries pursue similar price change policies (in the sense of responding to cost and demand changes in the same way and to the same extent).