The Structure of Production, the Composition of Final Demand, and the Determination of the Price Level and Employment

The accepted income expenditure model has not considered the implications of alternative assumptions under which commodities are supplied. This study examines the income model with the condition that the interest rate and price of assets are consistent with the conditions under which capital goods and consumption goods are supplied. The examination concentrates on the discussion of: 1. the full implications of the constant cost technology characterizing real opportunities in the standard macroeconomic paradigm, 2. the influence of increasing marginal costs, and 3. the assumption that capital stocks are completely specialized with respect to activity and are, therefore, immobile. The conclusions resulting from this study are: 1. The implications of substitutions in expenditures between investment goods and consumables for changes in aggregate demand are less certain than previously thought. 2. Predictions of the direction of change require more information.