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A conditional demand approach to the Alchian–Allen effect

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  • Minagawa, Junichi
  • Upmann, Thorsten

Abstract

We explore the Alchian–Allen effect–that is, the effect of an absolutely equal increase in the price of two goods on their demand ratio–for conditional (viz. short-run) and unconditional (viz. long-run) demand functions. We show that the Alchian–Allen effect for unconditional demand equals its conditional counterpart (where the consumption level of a third good is held constant) if the two goods feature identical substitution elasticities with the third good. Remarkably, this result holds true for both Hicksian and Marshallian demand functions.

Suggested Citation

  • Minagawa, Junichi & Upmann, Thorsten, 2013. "A conditional demand approach to the Alchian–Allen effect," Economics Letters, Elsevier, vol. 120(3), pages 546-551.
    • Handle: RePEc:eee:ecolet:v:120:y:2013:i:3:p:546-551
    DOI: 10.1016/j.econlet.2013.06.017
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    References listed on IDEAS

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    Cited by:

    1. Junichi Minagawa & Thorsten Upmann, 2016. "Optimal Taxation under a Consumption Target," CESifo Working Paper Series 6067, CESifo.

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    More about this item

    Keywords

    Alchian–Allen theorem; Conditional and unconditional demand functions; Compensated and uncompensated price elasticities;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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