Supply 0,’1 0 Function of Price of other Goods
Albert Churchman discusses in his book “The Strutted of (Ch. 6) economic interdependence as it governs the supply of goods. According to him interdependent relationship in supply can he of two types: horizontal and vertical. There is horizontal relationship between goods when they arc used at the same stage or production c.g. at the consumption or factor input level. In this case, the two goods compete with each other for the purchaser’s choice. Consequently, there will be a unique, pecuniary linkage relationship between the two that is essentially a demand cross elasticity relationship.
But in the case of vertical relationship one good ” an put for the production of another good has a slurred linkage relationship when it is used as a factor input for another, hut the good produced has a backward linkage relationship. Whatever the case may be there is an important functional relationship between the price (If one good and the supply of another. When the relationship is horizontal, it is almost
always an inverse relationship. That is, if the price of one good rises the demand for the other good will increase, The coefficient of cross elasticity is negative. On the other hand, when the resource transfer ability IS low as between production of say wheat and c r .coefficient of cross elasticity is low or zero. In the case of forward vertical relationship, an increase in the price of the final product will induce a • rescind the price of the factor input. The coefficient of cr elasticity will then be positive. The strength of of the coefficient Will depend upon the extent to which one good uniquely an input I r. North,