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The Limits Of An Economic Society
Wages
The Law Of Accumulation Of Capital
Value And Its Relation To Different Incomes
The Law Of Population
Boycotts And The Limiting Of Products
Organization Of Labor
Normal Value
Effects Of Dynamic Influences Within The Limited Economic Society
Perpetual Change Of The Social Structure


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Leading Facts Concerning Money
Production A Synthesis Distribution An Analysis
Further Influences Which Reduce The Hardships Entailed By Dynamic Changes
Capital As Affected By Changes Of Method
The Measure Of Consumers' Wealth
Effect Of Improvements In Methods Of Production
The Law Of Interest
The Foregoing Principles Applied To The Railroad Problem
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Conditions Insuring Progress In Method And Organization


Value And Its Relation To Different Incomes








Functional distribution controls personal incomes since each man who
gets, in a normal way, any income at all performs one or more
productive functions, and his total income is the sum of the returns
for these several functions. Moreover under such a condition of
ideally perfect competition as we have assumed each of these functions
is rewarded according to the product that it creates; and each man
accordingly is paid an amount that equals the total product which he
personally creates. Men's products, even in the disturbed conditions
of actual life, set the standards to which their returns tend to
conform, though they vary from them in ways that we shall not fail to
notice.

Group Distribution

The grand total of the social income has to go
through a preliminary division before it is shared by laborers,
capitalists, and entrepreneurs. In each industry the pay of all
these functionaries comes from the selling price of the commercial
article that they cooeperate in making. The price of shoes pays all
shoemakers, whether what they contribute to the manufacturing is
labor, capital, or mere cooerdination; and it also pays ranchmen and
tanners for what they contribute in the shape of leather, raw and
dressed. If the price of shoes should rise, there would be a larger
income for the group whose activities create them. So if woolen
clothing were to become dearer, there would be more money for the
group that makes it, and this would include those who raise sheep and
those who convert wool into cloth, as well as the garment makers
themselves. The question, what members of a group would get the
benefit of a rise in the price of its product, is one that must be
discussed in connection with economic dynamics, and we shall find,
when we reach this part of the subject, that it is entrepreneurs'
gains which come largely from sources like this. We have already seen
that, in a static condition and with prices, wages, and interest
immovably held at rates to which perfectly free competition would
bring them, entrepreneurs as such would get nil, and the whole
price of every article would be distributed among the laborers and the
capitalists who make it. The proof of this will appear when we have
examined the process by which the values of goods are adjusted, and
this will help to prepare the way for a study of the sources of net
profits, which are an all-important feature of actual business.
Society is honest or dishonest according as this entrepreneurs'
income is gained in one way or in another; and it is not too much to
say that before the court of last resort, the body of the people, no
system of business will be allowed permanently to stand unless the
basic principle of it tends to eliminate dishonest profits. A chief
purpose of static studies is to afford a means of testing the
legitimacy of the incomes that come to entrepreneurs.

Market Price

The old phrase supply and demand describes the
process by which the market price of anything is determined. The total
mercantile stock of goods of a particular kind at any one time on hand
is, of course, an exact quantity, and the law of "market value," when
these words are used in a restricted and technical sense, determines
the price at which this predetermined amount can be sold.

How a Normal Supply is Determined

This present stock, however, was
brought into existence by producers who looked forward to the time
when they could probably sell it at a certain price; and the higher
this anticipated return for the article, the more of it they were
induced to make. The price, which to-day depends on the quantity on
hand, acted in advance as a lure to bring that quantity into
existence, and among the different articles which men can produce,
they are forever singling out for increased production those things
which offer the strongest lures--that is, the things that sell for the
largest amounts as compared with the cost of making them. The ultimate
tendency of all this is a certain adjustment of the relative supplies
of different commodities. It is that adjustment which brings all
prices to a level determined by cost.

Natural Value

This tendency toward cost prices--those which
afford to the producers wages for all their labor but no true
entrepreneurs' profit--establishes a further law, that of "natural
value," and this it is that fixes the standard to which, in the long
run, market values, as adjusted by supply and demand, tend to conform.
A market value is natural or unnatural according as it does or does
not conform to a certain standard, and this ultimate standard itself
is the cost of producing the several kinds of goods. What the term
cost in this connection really means we must later see; but for the
present we may take the common and practical view that it is the
amount of money that an entrepreneur must pay out in order to bring
the article into existence. If there were very little wheat in the
granaries of the world, demand acting on this limited supply would
determine the selling price of it, and this price would be high as
compared with the cost of raising this grain. It would also be higher
than the selling prices of other things which are produced by the same
expenditure of labor and capital that has to be made in raising the
wheat. The market price would, for the time being, be unnatural and
would in due time be brought down; but this would have to be done by
the raising of more wheat. In other words, though the selling price of
a small supply of wheat may be normal for that amount, the amount
supplied is itself abnormally small, and in view of that fact the
resulting price is too high to be allowed to continue. As a permanent
price it would not be natural. The quantity supplied tends to increase
till the market price conforms to the cost of raising the wheat. We
have to see, first, how demand fixes the price of a definite amount of
anything which is offered for sale and, later, how the quantity
offered is controlled.

How Prices are Determined

It is certain that if, in a given
market, we increase the quantity of goods that are to be sold, we
lower the price,[1] while, if we diminish the quantity, we raise the
price. That is the commercial fact and it furnishes a beginning for a
theory of value.

[1] The term market, as used in this discussion, means a
local area within which goods of given kinds are bought and
sold; and for different purposes we may make the area small
or large. For some purposes it is necessary to take a "world
market" into consideration, while for others it is desirable
to include only that part of the world within which
competition is very active and within which also goods and
persons move freely and cheaply from place to place. A single
country like the United States affords a market large enough
to illustrate the laws of value, though one must always keep
in view the relation of this circumscribed area to its
environment. How local areas may, in a scientific way, be
delimited and isolated for purposes of study will appear in a
later chapter.

Let us suppose that we have a fixed quantity of goods on hand, that
all must be sold, and that no one knows at the outset what price they
will bring. There might conceivably go on an inverted kind of
auctioning process, in which the sellers at the outset would ask a
high rate, sell a few of their goods, and then gradually reduce the
price till the last article should be sold. At each reduction of the
price the "effectual demand," so-called, would increase. This means
that the people who want the article are actually willing to take and
pay for larger quantities the lower the price falls. Mere desire does
not influence the market, but an "effectual demand" means a desire and
a tender of the money that is asked for the goods. It is, in short, an
actual purchase and the amount of it becomes larger as the price goes
down. People who did not buy the article before now add it to the list
of goods that they take for use, and the people who were already
taking a certain quantity of it now take more.

Equation of Supply and Effective Demand

If this effective demand,
or amount of goods actually bought and paid for, becomes steadily
larger the lower the price becomes, it is clear that, however large
the total supply may be, it can all be sold by making the price low
enough. It was once thought that this is all we need to know of prices
current or market values. At some selling rate or other the quantity
actually offered will come to equal the quantity that is actually
bought. This is the equation of demand and supply. The quantity
offered is here supposed to be fixed and to include all of the
article that is in dealers' hands and that has to be sold; and the
price, starting at a high rate, is supposed to go down till the sale
of the entire quantity is effected.

Varying Demand and Price

The facts that have just been stated
account only in a partial way for the adjustment of market price. One
who wishes to trace phenomena to their causes cannot help asking why
demand and supply insure the selling of a given amount of goods at one
rate rather than at another. If apples are offering at two dollars a
barrel, why is it that, in a particular local market, one thousand
barrels and no more can, at that rate, be sold? We can readily see
that at one dollar a barrel more could be sold than at two, and that
at three less would be sold. But why is it that, at two dollars, the
definite number of one thousand barrels is the amount that is taken
and paid for? Why is the equation of demand and supply established at
exactly that price?

Demand and Final Utility

We come nearer to the cause that acts in
adjusting the price of apples when we say that they sell at two
dollars a barrel because that sum expresses their "final utility."
This means that, if such an auctioning process as we have described
were resorted to, the last barrel of apples which would be sold would
have to the buyer an amount of utility just equal to that of the final
unit of any other article that could have been had for the same money.
The auctioning, however, would cause different barrels of apples to
sell at different prices, whereas there is something in the working of
competition which causes all of them to sell at the same price. It is
necessary to see, first, how the price of the "final" one is adjusted
and, secondly, how that fixes the price of all the others.

The Law of Diminishing Utility

We revert here to one of those
general laws of economics that we have already stated and see it
acting under the conditions of distinctly social life. Goods of a
given kind have less and less utility, per unit, the more the user has
of them. If you offer him apples in increased quantity, he will value
the first part of the supply highly, but will attach less value to the
later parts. When the desire for this fruit is fairly well satisfied,
he will find other articles of more importance. At the price of two
dollars a barrel it is just worth his while to buy a final barrel of
them. That quantity, as added to his winter's supply, will give him
two dollars' worth of benefit. This means that it will do him as much
good as anything else which he can get for the same amount of money.

The Equalization of Final Utilities

Two dollars spent in adding to
his previous stock of other things will do the man in the illustration
the same amount of good that he can get from a final barrel of apples,
and no more. In the case of goods which are all alike and of which
consumers are always glad to use an additional amount, prices tend to
adjust themselves in such a way that a final unit of any one which the
consumer buys with a dollar is worth just as much to him as a final
unit of any other article he buys with that amount. The last dollar
paid for apples is as remunerative, in the way of pleasure and benefit
secured, as is the last dollar used to improve his wardrobe, to add
something to his stock of furniture, to buy tickets to the theater,
etc. Apples have, as it were, to compete with clothing, furniture, and
amusements for the consumer's favor, and if the vender charges more
for them than do the venders of other things having the same power to
give pleasure, some of the apples will remain unsold; for though
customers will always give as much as they would have to pay for other
things of equal final utility, they will not give more.

The Prices of All Increments of Supply Equal

A consumer always
gets a net surplus of benefit from the early increments of the goods
he consumes. If the last barrel of apples is worth two dollars,--or,
what is the same thing, if the last barrel has in it an amount of
utility equal to the final utility of other things that two dollars
will buy,--the first barrel has a larger utility; and yet it costs no
more than the last one. The sellers of apples, if they expect to
dispose of all that they have, must at the outset fix the price at
such a point that the very last increment of the supply will
successfully compete with other articles for the favor of purchasers.
Competition forces them to sell the whole amount so cheaply that the
least important part of it may be as important to the purchaser of
that part as the corresponding and least important part of the supply
of other things. Nothing but a monopoly of the entire available stock
would enable them to carry out the auctioning plan and offer the stock
piecemeal, so as to get a higher price for the parts offered early.
Even then buyers who should perceive the fact that a large part of the
stock remained in reserve and that it must ultimately be sold would be
able, by delaying their purchases, to get the benefit of a later and
lower rate, so that the monopoly itself would be only partially
successful in its policy. In the absence of a monopoly venders are
compelled to sell all articles of one kind and quality at one price.
The man who should fix a higher price on his portion of the supply
would be passed by in favor of other sellers who were disposing of
their final increments, and his business would quietly drift away from
him. There cannot be two prices for one commodity in the same market
at the same time. This fact is fundamental. Even the monopoly is able
to get different prices for different parts of its output only by
offering them at different times; and competing producers cannot do
this. They are forced to keep the price of all they offer at a level
that expresses its final utility.

The Law of Value affected by the Difficulty of using Two Similar
Goods at Once

There are two imperfections in the common statement
of this law of final utility which need to be removed in order that
the theory of value, which is based on the law, may be true and
useful. The first lies in the assumption that people buy completed
articles, such as coats, tables, vehicles, watches, etc., in regular
series of units, adding to their stock coat after coat, watch after
watch, etc., all just alike, till the utility of the last one becomes
so small that it is better to buy other things. On this supposition
the price of the whole supply of any such thing corresponds with the
utility of the last one in the consumer's series. This fairly well
describes the case of commodities like apples, of which men consume
now more and now less per day or per week and are always glad to
increase the amount they use. Of most kinds of consumers' goods a
person wants at one time one unit and no more, and a second unit, if
he has to use it himself within the same time in which he uses the
first, would be an incumbrance. Its utility would be a negative
quantity. Two quite similar coats would never be bought by the same
person if he had only his own needs in view and must use both coats
through the same period. The first unit of his supply is, for this
period, also the last.

The Law of Value affected by the Fact that the Final Unit of a Good
is usually a Complex of Unlike Utilities

The second imperfection
consists in the assumption that in measuring the utility of such a
unit the consumer estimates the importance to himself of the article
taken in its entirety. In the case of the apples of our illustration
the difficulty is not obvious. A man, as we have just noticed, may
increase or diminish his consumption of this fruit; the first few
apples that he uses will give him more pleasure than a second similar
quantity, and the price of apples in the market may actually depend on
the utility of the final peck of apples that each of the customers
consumes in a season. In other words, there is, in this instance, a
probability that the goods, although supplied at once, may be
appraised as if they were offered in a regular series and that the law
of final utility, in its common and simple form of statement, may in
this particular apply to the case. The second difficulty, however,
remains, and even in the case of such goods as apples renders the
common statement somewhat inaccurate, while in the case of most kinds
of consumers' goods the inaccuracy is glaring. If the price of fine
watches corresponded with the utility of the last one that a consumer
uses, it would be many times greater than it is. Rather than go
without watches altogether many a man would pay one thousand dollars
for one for which he actually gives a hundred; and, moreover, this
watch may be the "final" one in his case. The utility of the last
overcoat that a man uses in the winter may be such that, if he could
have it on no other condition, he would readily give five hundred
dollars for it instead of fifty.

How Unlike Services may be rendered by One Good at the Same
Time

What people want of any useful thing is an effect in
themselves,--a pleasure or a benefit which they expect to get,--and
apart from this subjective result they would not want the thing at
all. The power to confer a particular benefit is a utility. Men buy
goods solely for their utilities, and they measure these
service-rendering powers in the things offered to them and pay for
them accordingly. Now, it happens that articles often combine in
themselves a considerable number of different utilities, or
service-rendering powers, and that in buying an article the man pays
for them all. It is as though four or five different servants, each
having his own specialty, were to offer themselves for hire and invite
an employer to consider what each one could do for him. In buying an
article which will serve him in several ways, a man appraises all the
unlike services that the article will render. He secures several
services at once, as he would do if he hired, in a body, several
actual servants. The same thing would happen if, instead of hiring
human servants with different aptitudes, one should buy different
commodities each of which is, in reality, an inanimate servant, able,
in its own way, to do something useful or agreeable for the purchaser.
We could bunch a lot of these goods and buy them collectively. Venders
of the goods could tie them together in bundles and offer them thus
for sale. If the different goods were also sold separately in the
market, they would command in the bundles the same prices that they
would command when sold each by itself, and a bundle would bring the
sum of the several prices of its component articles. In just this way
in which an aggregate of different goods would get its valuation does
any one article which is made up of different utilities get its
rating. The utilities are appraised separately. In buying an article
which is a composite of different utilities, we virtually employ a
company of servants who have different specialties and insist on being
hired all together or not at all.

How the Normal Price of a Bundle of Unlike Goods would be Fixed

We
have now to see how the action of the market analyzes an article and
puts a price on the several utilities which compose it. The market
does this in exactly the same way in which it would appraise a bundle
of dissimilar articles which had to be sold separately, and we will
therefore trace the operation by which a package containing the
commodities A, B, C, and D would get its value in an actual market.

How the Normal Price of a Single Good in a Bundle of Unlike Goods
would be Fixed

Let us see how a bundle made up of commodities A, B,
C, and D would get its value in the market. We will suppose that these
articles are here named in the order of their importance, and that A
has the highest utility, since it renders the most important service,
and that D has the least. It may be that the article A has a utility
rated at one hundred dollars in a particular man's esteem. He would
give one hundred dollars for it rather than do without it altogether.
The service, then, that one article of this kind can render is
expressed by the sum one hundred dollars. Article B taken separately
may be worth fifty dollars, since it may render such services that the
man would give fifty dollars rather than be without it. A third
article, C, may in the same way be valued at twenty dollars and a
fourth at ten. Now, if a man has to buy the whole bundle, must he pay
one hundred dollars plus fifty plus twenty plus ten, or one hundred
and eighty for the whole? This does not by any means follow. The first
article may be sold separately at a price far below one hundred
dollars. There may be so large a supply of it that, in order to find a
market for it all, the makers must take ten dollars for it. This fixes
the market price of that amount of this commodity at ten dollars. If
we now glance beyond the question of the "market price" of the goods
and consider their more permanent or "normal price," the inquiry
requires us to do more than ascertain why a definite quantity of the
goods offered at a certain time sells for a certain amount. An appeal
to the law of final utility answers that question. To know, however,
why the permanent price is what it is, we have to know what fixes the
permanent supply, and we discover that the cost of making the goods is
here a dominant influence. For the present we assume that this cost
does not change, since such changes are a subject for the dynamic
studies which will come later. The present fact is that production has
been carried to such a point that no more of these goods can be sold
at the cost price, and there the enlargement of the output has
stopped; the supply has at some time in the past reached this normal
point and now remains there. Ten dollars represents the final utility
of the article, and this sum is what it costs to make it. If it could
be sold for any more than that, competition would bring new producers
into this business and would impel those already in it to enlarge
their production till the price would stand at the normal or cost
level of ten dollars.

The Consumers' Surplus

In every such case there are men who would
give much more for the article rather than be without it, and we have
supposed that some one would pay a hundred dollars for this commodity
if he could not otherwise obtain it. Ninety dollars, then, measures
what we may call his consumers' surplus, or the clear benefit he
gets from buying at its market price an article that is worth to him
so much more. This comes about by the fact that the makers of article
A, in order to sell the amount of goods that competition has impelled
them to make, must accept the offers of persons who can consistently
give only ten dollars for it. These are relatively poor persons, and
as the sum of ten dollars expended on other articles would benefit
them as much as ten dollars spent on this one, it is a "final"
purchase, or a final increment of their consumers' wealth. In order to
get it they sacrifice, in some other form, a benefit as great as the
one they get from acquiring this commodity and receive, therefore, no
consumers' surplus from it. These are the men whose demand helps to
fix the price of the article A, and the willingness of other persons
to give more does not make it bring any more. The rich men, who stand
ready to pay a hundred dollars, if necessary, are gainers by letting
poorer men fix this price. It is by catching the patronage of these
poorer men that the makers can dispose of their large output, and in
doing this they have to bring the price down to ten dollars.

The Function of a Special Class of Marginal Purchasers of Each
Article

In like manner there is a class of "marginal purchasers" of
the article B, or the persons who pay for it so much that they get no
net benefit or consumers' surplus from the purchase. If they did not
buy this article, they could get something else that would do them as
much good for the same outlay. It costs, let us say, only ten dollars
in the making, and enough of these articles are made and offered for
sale at that price to supply all customers who are attracted by the
offer. The men who would pay more for it do not count. Each of the
other articles in the bundle, when it is offered separately and at the
cost price which competition establishes, represents a final utility
to some one class of purchasers. Competition has made the whole supply
so large that, in order to dispose of it, venders must attract the
particular class who will take it at the ten-dollar rate. This class
is in the strategic position of market-price makers for this one
thing. They are the last class to whom the producers can afford to
cater. If each of the five articles in the bundle costs the makers ten
dollars, and if so many of each are made that they just supply the
needs of the classes that will buy them at ten dollars apiece, the
price of all five, when sold separately, will be fifty dollars. Most
of the purchasers of each article would give more than ten for it if
they had to, but some would not do so, and the producers cater to the
needs of these marginal persons.

How the Prices of the Goods are fixed when they are sold in Various
Combinations

How do these articles get their valuation when they
are tied in bundles containing all five of them and the bundles are
sold unbroken? In essentially the same way as when sold separately.
Article A, we will suppose, is one of the necessaries of life and is
to be had by itself in the market. Article B represents a comfort, and
C and D are luxuries. The bundles are so made that A and B are often
sold together; as are also A, B, and C; and A, B, C, and D. A
purchaser may have at his option the first only, the first and the
second combined, the first three, or all four. Article A, when it
stands alone, can be had at the natural or cost price and in quantity
sufficient to supply the wants of all classes of buyers from the
highest down to the class which will take it at ten dollars--the cost
of making it--but at no higher price. Any one can have the A either
alone or tied to other articles at this price. One who buys A and B in
combination will pay for article A only the same price that it
commands when sold separately; and since he buys B, the utility of
which is less than that of A, at ten dollars, it is clear that he gets
A for less than it is worth to him, but the ten dollars may be all he
would give for the B. This man is not the marginal purchaser of A, for
in buying it he realizes a consumers' surplus; but for the article B,
which is tied to it, he may pay all that it is worth to him. For that
he is a marginal purchaser, and as such he gets no consumers' surplus
out of it. What he pays for B will just suffice to buy something else
which is equally important to him. The price of this bundle of two
articles is ultimately determined by the cost of the two components,
which is twenty dollars, and enough of each component is made and
offered in the market to supply the wants of a class of persons who
will barely decide to take it at the cost rate. The class that
hesitates at taking A will not consider B, but the class that
hesitates at taking B gets a clear benefit from buying A at the price
that expresses the utility of A to a poorer class of persons.

How Different Classes of Purchasers cooeperate in this Price
Making

The rule of one price for one article of course holds, and
the man who would have a clear and decisive motive for buying the A
for more than ten dollars, if he had to do so, gets the benefit of two
facts: first, that it costs only that amount in the producing, and
secondly, that competition makes the supply of it so large that it is
brought within the reach of those persons who value it at only ten
dollars. It takes two different classes of purchasers to fix the price
of this package of two articles, and their ratings fix it at twenty
dollars. Exactly the same influences regulate the price of the bundle
which includes A, B, and C. Men who buy C can afford to have a luxury,
and therefore, if they had had to do so, would have given more than
they do give for the articles of necessity and comfort. If the price
of A and B were higher than it is, they would still buy these two
things, but they would not raise their bids for C, since for this they
are marginal purchasers. This commodity is therefore sold at the price
that will just induce this class of persons to add it to their list of
consumers' goods. There is a further class in whose list of purchases
D is marginal, while A, B, and C yield a consumers' surplus in the
form of an uncompensated personal benefit.

Different Utilities in an Article appraised as are Different Goods in
a Package

It is an actual fact that most commodities are like these
packages of unlike articles. They are bundles of unlike utilities,
and the market actually finds a way to analyze composite things and
put a separate price on each utility. It may seem very theoretical to
say that a concrete thing, like a watch, a coat, a dining table, or a
roast fowl, is made up of such abstract things as utilities and that
each of these has its separate price; yet such is actually the fact,
and if goods were not valued in the market in this way, the prices of
all articles of comfort and luxury would be very much higher than they
are.

A man pays seventy-five dollars for an overcoat, but if he could not
get the service that the coat as a whole renders without paying five
hundred dollars for it, he would pay it; for otherwise he could hardly
get through a winter. No man who buys an overcoat worth seventy-five
dollars would refuse to pay more if that were the necessary condition
of having an overcoat at all. The garment as a whole is far from being
a "marginal utility" to any one; and yet there is something in it that
is so. This element is like the article D in the fourth bundle
referred to in our illustration. There is a particular utility in the
composite good for which the man pays all that it is worth to him; and
he would go without that utility if the seller charged more than he
does. The most important service that the coat renders is that of
keeping the man warm; but a very cheap garment would render that
service, and six dollars will buy such a garment. The man does not
need to pay more than six dollars for that one service. The supply of
cheap coats is such that the final one must be offered for six dollars
in order to induce certain poor purchasers to buy it, and that,
moreover, is all that it costs to make it. No one, therefore, is
obliged to pay more than six dollars for something that will keep him
warm, however much such a service may be worth to him. Coats of
another grade have a second utility combined with this one, since they
are made of better cloth and are more comely in appearance. Utilities
of an aesthetic kind are combined with the crude qualities represented
by the cheapest coats. The supply of coats of this grade is such that
they must be offered for twenty dollars in order to induce some one to
take the final or marginal one. What does this mean? It means that
this purchaser will pay fourteen dollars and no more in order to have
the second utility, consisting in comeliness, added to the first
utility, capacity to keep him warm. This man would give more than
twenty dollars rather than go uncloaked; for it is plain that, if he
will pay fourteen dollars for comeliness, he will give more than six
for warmth. Probably he would pay one hundred dollars for the article
if he had to, and in getting it for twenty he gets a large consumers'
surplus. This is because he secures the first utility (1) for less
than it is worth to him, (2) for just what it costs in the making, and
(3) for just what it is worth to the poorer purchasers. He is willing
to pay only fourteen dollars for the comeliness, which is the second
utility that the garment contains, and he is therefore a marginal
purchaser of this second utility. It costs only the sum of fourteen
dollars to add the second utility to the first, and enough coats of
the second grade are made to catch the patronage of the class of
buyers who will give so much and no more for it. They are the persons
whose demand figures in adjusting the market price of this second
utility. Competing producers of coats cause the supply of those of the
second grade to be so large that they could not all be sold unless the
second utility were offered for fourteen dollars. This makes the price
of the entire coat twenty dollars as the result of catering in a
detailed way to the demand of two different classes of buyers.

In exactly the same way the price of the third grade is fixed at forty
dollars and that of the still higher grade at seventy-five. In the
third grade there is a utility which it costs twenty dollars to add to
those possessed by garments of the second grade, and this is added to
enough of them to supply all persons who will pay twenty dollars or
more for it. These coats are made of more highly finished goods and
have better linings, and this gives them the third utility which the
market appraises at its cost, which is twenty dollars. The men who buy
the forty dollar coats get a surplus of benefit in securing the first
two of the utilities that are embodied in them, since for these they
pay less than they would pay if they had to; but they get no surplus
over the cost of the third utility. It is to secure their custom that
the vender must sell it for twenty dollars. In a like manner a coat of
the next grade, which is a more fashionable garment, sells for
seventy-five dollars because it has a fourth utility which costs
another sum of thirty-five dollars and, to the marginal buyers, is
worth that amount. These men get a surplus from buying the first three
utilities at what they cost their producers and what they are worth to
poorer purchasers. It appears, then, that a seventy-five dollar coat
is a bundle of distinct elements, or utilities, each of which has its
separate cost and is sold at that cost price to a particular marginal
class of purchasers. Each element is valued exactly as if it were in
itself a complete article tied in this case to others, but also
offered separately in the market. Persons of one class are final
purchasers of the first utility when it is offered at its cost, six
dollars. Another class, in a like manner, helps to set the price of
the second utility at fourteen, and still other classes figure in the
adjustment of the prices of the third and fourth utilities. These cost
the manufacturers twenty dollars and thirty-five dollars respectively,
and competition insures the making of enough of them to catch the
patronage of those who will pay just these amounts. Members of one
class act as marginal purchasers in price making in the case of one
utility only. The concurrent action of all of them results in setting
the price of the best coat at eighty dollars. It is a very practical
fact that the rates at which all fine articles sell in the market are
fixed in this way. Such articles contain utilities unlike each other.
They have power to render services of varying degrees of importance,
and each of the several services gets its normal valuation when
producers make enough to supply the want of a particular group of
persons to whom it is a marginal service and who are willing to pay
only what it costs. They would go without that one service if they had
to pay more for it.

This Method of Valuation Applicable to All Commodities of High
Grade


indefinitely. A fine watch tells the time of day, but something that
would do that could be had for a dollar, and that is all that this
fundamental element in the fine watch sells for. It takes a series of
purchasers bidding on the higher utilities of the fine watch to make
it sell for five hundred dollars. The man who buys such a watch would
give, perhaps, ten thousand for it rather than be without a watch
altogether, but he is saved from the necessity of doing so by the fact
that poorer customers have done the appraising in the case of all the
more fundamental qualities which the watch possesses. So long as an
Ingersoll "dollar watch" will tell the time of day, no one will pay
more than a dollar for exactly that same service rendered by any watch
whatever; and the same thing is true of other services. Social in a
very concrete and literal sense is the operation of fixing prices.
Only the simplest and cheapest things that are sold in the market at
all bring just what they are worth to the buyers, and all articles of
higher grade offer to all who buy them a surplus of service not offset
by what is paid for them. If we rule out the cheapest and poorest
grades of articles, we find all others affording a "consumers'
surplus."[2]

[2] It will be seen that to a man who buys the seventy-five
dollar coat that article in its entirety is the final one of
its kind which he will buy. He does not want a second coat
exactly like the first. The same thing is true of the man who
buys the five hundred dollar watch, since he does not think
of buying more than one. In each case the first unit of the
article bought is the last one, and it contains utilities
which are worth more than they cost. It contains one utility
only which is marginal in the true sense of affording no
surplus of gain above cost. This utility stands on the
boundary line where consumers' surpluses stop.





Next: Normal Value

Previous: Production A Synthesis Distribution An Analysis



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