A Dual-Price Demand Theory for Economies under Transition

Guy Shaojia Liu, Haiyan Song

Research output: Journal article publicationJournal articleAcademic researchpeer-review

Abstract

China adopted a dual-price system shortly after the economic reform started in 1978 to liberalise its price control. This led to the coexistence of both plan and market prices for an identical good in the economy. The conventional demand theory developed based on the pure market economies is not useful in explaining consumers’ behaviour in the transitional economies such as China in which both plan and market prices are prevalent. This study develops an alternative demand theory for a dual-price (or dual-track) economy and derives the dual-price Slusky equation that identifies a replacement effect of price liberalisation. This demand theory distinguishes itself from the conventional demand theory and explains the ways in which consumers respond to the price liberalisation during the reform period. The newdemand theory shows that the gradual approach to reform is superior to the ‘Big Bang’ approach in terms of reducing the ‘corrected inflation’ during the transition period. The newtheory also suggests that the price elasticity of demand is higher in the dual-track system than that in a full market economy, implying that the price elasticity diminishes over the process of price liberalisation. This theory is tested using the Chinese aggregate consumption data.
Original languageEnglish
Pages (from-to)185-203
JournalJournal of Chinese Economic and Business Studies
Volume1
Issue number2
DOIs
Publication statusPublished - 2003

Keywords

  • Dual-Track Demand Theory
  • Transition Economies
  • Price Elasticity

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