CH. 21

THE THEORY OF PRICES

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no longer with the demand for a single product takenin isolation, with demand as a whole assumed to beunchanged.

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If we allow ourselves the simplification of assumingthat the rates of remuneration of the different factorsof production which enter into marginal cost all changein the same proportion, i.e. in the same proportion asthe wage-unit, it follows that the general price-level(taking equipment and technique as given) dependspartly on the wage-unit and partly on the volume ofemployment. Hence the effect of changes in thequantity of money on the price-level can be consideredas being compounded of the effect on the wage-unitand the effect on employment.

To elucidate the ideas involved, let us simplify ourassumptions still further, and assume (1) that all un-employed resources are homogeneous and interchange-able in their efficiency to produce what is wanted, and(2) that the factors of production entering into marginalcost are content with the same money-wage so long asthere is a surplus of them unemployed. In this casewe have constant returns and a rigid wage-unit, so longas there is any unemployment. It follows that an in-crease in the quantity of money will have no effectwhatever on prices, so long as there is any unemploy-ment, and that employment will increase in exact pro-portion to any increase in effective demand broughtabout by the increase in the quantity of money; whilstas soon as full employment is reached, it will thence-forward be the wage-unit and prices which will in-crease in exact proportion to the increase in effectivedemand. Thus if there is perfectly elastic supply solong as there is unemployment, and perfectly inelasticsupply so soon as full employment is reached, and ifeffective demand changes in the same proportion as thequantity of money, the Quantity Theory of Money can