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 n 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.