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Lhe law of diminishing elasticity of demand in Harrod’s trade cycle

Author

Listed:
  • Michaël Assous
  • Olivier Bruno
  • Muriel Dal-Pont

Abstract

In The Trade Cycle, Roy Harrod [1936a] propounded the Law of Diminishing Elasticity of Demand. The present paper tries to clarify the precise role Harrod assigned to this law in his The Trade Cycle Theory. We discuss the micro and macro foundations of the Law of Diminishing Elasticity of Demand and argue that it explains one of the main mechanisms that stabilize the economy during the trade cycle. In addition, we highlight how the Law of Diminishing Elasticity of Demand allowed Harrod to micro-found a nonlinear saving function that can give rise to an endogenous countercyclical value of the multiplier. The paper concludes by reviewing the main arguments related to the Law of Diminishing Elasticity of Demand proposed in the late 1930s

Suggested Citation

  • Michaël Assous & Olivier Bruno & Muriel Dal-Pont, 2014. "Lhe law of diminishing elasticity of demand in Harrod’s trade cycle," Cahiers d’économie politique / Papers in Political Economy, L'Harmattan, issue 67, pages 159-174.
    • Handle: RePEc:cpo:journl:y:2014:i:67:p:159-174
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    Keywords

    Trade cycle; imperfect competition; law of diminishing elasticity of demand; Harrod.;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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