THE EMPLOYMENT FUNCTION

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That is to say, the sum of the elasticities of price and ofoutput in response to changes in effective demand(measured in terms of wage-units) is equal to unity.Effective demand spends itself, partly in affecting out-put and partly in affecting price, according to this law.

If we are dealing with industry as a whole and areprepared to assume that we have a unit in which outputas a whole can be measured, the same line of argumentapplies, so that e' v + e 0 = 1, where the elasticities withouta suffix r apply to industry as a whole.

Let us now measure values in money instead ofwage-units and extend to this case our conclusions inrespect of industry as a whole.

If W stands for the money-wages of a unit of labourand p for the expected price of a unit of output as a

whole in terms of money, we can write eJ = for

pdT)

the elasticity of money-prices in response to changes ineffective demand measured in terms of money, and

' for the elasticity of money-wages in re-

WDy

sponse to changes in effective demand in terms ofmoney. It is then easily shown that6 $ = 1 — € q (^1 — £«;)•

This equation is, as we shall see in the next chapter,a first step to a generalised Quantity Theory of Money.

1 For, since p =f w .W and D=D„.W, we have

a/.=wa/„+4aw

= W.e' ^-AD„ + 4 aWD w W

-''•S( AD -

D

AW

-w AW

= f '4 AD + AwL( r _ e' v ),

_da/ D .A\W?,’"TAD B+ />AD W 1 *'

=e'„+e a (i- e' v )

= 1 - e a (i - eJ).

so that