Structural change with non-essential and elastic goods

According to Adam Smith’s and Allyn Young’s concept of division of labour, market extent and the level of specialization reinforce each other. As a result, multiple equilibria can easily appear, and this feature has been incorporated as a core element in development economics. However, we need further conditions for the existence of multiple equilibria but existing literature largely ignores these conditions. We consider two production structures, one involving intensive division of labour (the modern sector) and one without (traditional sector). We demonstrate that the modern goods should be either non-essential or elastic goods over some relevant range, or multiple equilibria may not exist even if division of labour is important. We use quadratic utility and constant-elasticity-of-substitution utility models to show how each of these conditions takes effect respectively. These new conditions may also help us better understand some features that existed in early days of development.