Prosperity and Depression.pdf

94 AnalYsis of Theories Part IIf the demand for shoes rises from 100 to 1 10, the demand formachines rises from 5° to 100. Ifthe demand for apartments risesfrom 100 to I 10, the demand for houses rises from 80 to 16o.§ 21. ACCELERATION OF DERIVED DEMANDAS A RESULT OF nm EXISTENCE OF PERMANENT STOCKS OF GOODSEvenifthere are no durable means ofproduction,Analogy there may be a certain magnification of derived'With previous .demand, if distributors and producers hold stockscases. in a fixed (or relatively fixed) proportion to therate of sales or production. The assumption thatthe stock bears a fixed proportion to the rate of sales or to outputis the counterpart ofthe assumption that there is a fixed relationshipbetween output and n1acmnes.Let us start again with a static situation, say, with a monthly saleof 100,000 pairs of shoes. Suppose that dealers usually hold permanentstocks equal in magnitude to the sales of one month andthat demand and sales rise to 110,000 and the increase is believedto be lasting. Dealers will then increase their orders with producersby m.ore than their sales have gone up in order to bring their stocksup to the usual ratio to sales. They will order 12.0,000 pairs; butthe larger orders will be maintained only ifsales go on rising. Ifthe increase in sales ceases at the end of one month, even thoughthere is no decrease, stocks will no longer be augIIlented and ordersfor producers will fall to 1 I 0,000 (although not to the original levelof 100)000).The principle works~ however, in the other direction as well.H the demand for shoes falls off, dealers will reduce stocks and theirorders will therefore fall by more than the amount by which theirsales have decreased. Derived demand fluctuates more violently.Although from the formal mathematical point ofSome view the parallelism between the case of stocks andqualifications. the case of fixed capital is complete, the case of thestocks presents some quantitative peculiarities, theconsequence ofwhich is to imply much more drastic qualificationsand reservations in the' application of the principle. (I) Theassumption of a comparatively fixed relationship between sales