The Effects of Reforming the Chinese Dual-Track Price System

is, the elasticity of supply with respect to p, es_p, is non-negative:

x^s = x^s (p) ; eS = PXpx≥ ≥ 0.
^p    xs   ^p

For simplicity, we shall assume throughout that the plan-track quantity is no
greater than the profit-maximizing supply at the plan-track price:⁷

x ≤ x^s (p) .

The plan-track price for suppliers is assumed equal to the plan-track price for
consumers. Thus, compared to the market economy, the DTP system operates as
a tax on suppliers, transferring to consumers a portion of profit. If we denote the
profit function corresponding to (5) as π(p), then total profit under DTP is

Π = π(p) — (p — p)x.

2.2 The CPI

In this section we explore how changes in plan-track parameters affect the weighted
average P of the plan-track and market prices for the representative DTP good
⁷Given that x > 0, this implies that variable costs are covered at the plan-track price.

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