[Note]

 

See accompanying letter

Let x = be output

p = (average) price

z = marginal cost

k = profit per unit

h = elasticity of demand = .

Then average cost .

and .

In response to small changes in h, the rate of change in profit, k is > the rate of change in price, p if . Now

.

Now if marginal cost > average cost 1 , is positive [c] = say. So that . if is positive

i.e. if is negative

i.e. if elasticity of demand falls as output rises.

This gives the following general result for a small change in the elasticity of demand

(1) with rising marginal costs--

"The rate of change in profits per unit is greater than the rate of change in price only if elasticity falls as output increases" --if is negative

(2) with constant marginal costs.

whatever be the relation between x and h. However, obviously , which is as in your example on top of p. 86.

(3) with falling marginal costs, if is negative, , but, under certain conditions may be > , so that even in this case the proportionate change in profit may be greater than the proportionate change in prices.

1. 1. Harrod, The Trade Cycle ( 1936:8 ).

   1. a. ALS, one page, in HP IV-962. The annexe AD, two pages on one leaf, is in file HP IV-961.

      b. Ms: «is».

      c. Ms: «+ve».

      d. Ms: «+ve».

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