That is, a man always acts to ensure that no desire is satisfied at the expense of the satisfaction of some more important want. This, after all, is only a different way of expressing the fact that man is intent on successfully achieving his goals. “Achieving one’s goals” means renouncing the achievement of a specific goal should it interfere with the achievement of a goal considered more important.
In the actuality of the everyday world, human beings are able to satisfy their wants only through directing their efforts toward appropriate means for such satisfaction. A man who wishes to eat may purchase food, cook food, or simply put on a hat and coat and go to a restaurant. His actions have been intermediary to the goal of eating. “Eating” is the end of his present endeavors; the means that he adopts for the attainment of his end can be an act of purchase, cooking, or walking to the restaurant. It is rare indeed that any act a man undertakes can be considered only an end in itself; in most cases actions are aimed at some goal that, upon examination, proves to be only intermediate to the attainment of some more “ultimate” purpose; and so on.
For our purposes it is not so much the distinction between ends and means that is of importance. Rather it is desired to emphasize that when men act to obtain the means necessary to fulfill their more ultimate goals, they are actuated by the same kind of calculation as when they aim at their goals directly. In particular, it is noted that the very considerations that constrain man to arrange his desires in order of their importance force him to make an identical arrangement among the means necessary to the fulfillment of these desires. In his attempts to obtain the means for the satisfaction of his wants, man directs his first efforts to the attainment of those means that minister to ends highest on the value scale. When forced, as in fact he constantly is forced, to choose between alternative bundles of “means,” man places the means in their appropriate rankings within the value scale. He is careful not to follow any course of action that would secure him the means of satisfying any desire, where this would be at the expense of items higher on the value scale—that is, at the expense of wants (or means for the satisfaction of wants) considered more urgent.
It is this complete scale of values that man at once sets up and follows, whenever he is called upon to choose. Man’s actions are invariably carried out under the constraint of some such value scale. Our analysis of demand theory is built on the logical consequences of the existence of such a scale—of the fact that man’s desires and the means to the satisfaction of these desires are not of equal “significance.” By “significance” we mean simply “importance,” judged by the yardstick set up by a man’s value scale. The terms “significance,” “importance,” “urgency,” and the like are used throughout demand theory to allow the idea of value ranking to embrace all objects and courses of action that man considers as desirable or worthy of attainment. A man may be in a position where he must choose between quite heterogeneous objects or values. He may be forced to choose whether to rush over his breakfast or to miss his train; whether not to tell the truth or to lose his job; whether to increase his costs by granting a salary increase to an employee or to risk being labeled a “skinflint.” No matter how unmatched the relevant alternatives may appear, the very fact that he is called upon to choose between them means that man must somehow rank them on the same scale. Thus, this scale must be far wider than one intended merely to rank values as more physically pleasurable or less, as more morally acceptable or less, as more esthetically appealing or less; it must, or more accurately, does rank objects and courses of action as simply more worthy of action or less. An item higher on the value scale, for action, is more “significant” than an item below it.
In the theory of demand, the term utility is to be understood as denoting simply “significance,” in the sense set forth in the previous section. As such the utility concept is fundamental to the theory of demand and to the understanding of the determination of prices. In this and in the next chapters we use the utility concept to analyze the actions of the consumer and the way his actions are adjusted to changes in basic market data. Our discussion begins with an illustration of the notion of marginal utility as it is reflected in a simple exchange transaction between two men and then proceeds to use marginal utility as a tool in the subsequent analysis.
Imagine two men A and B. Each possesses a quantity of both fish and fruit. However, A would gladly give up some of his fish if this would secure him more fruit; B is ready to give up some of his fruit if this will increase his supply of fish. When A and B become aware of this situation, exchange ensues. We will suppose that A gives 3 lbs. of his fish to B and obtains 10 lbs. of B’s fruit in exchange. Let us restate this simple case using utility terminology, from A’s point of view.
Both fish and fruit have utility for A; A would prefer, other things being equal, to have more fish than less fish and more fruit than less fruit. However, the utility to A of the 10 lbs. of fruit that he obtains from B is greater than that of the 3 lbs. of fish that A yields in exchange. For B, of course, the case is the reverse. The utility to him of the 3 lbs. of fish that he obtains is greater than that of the 10 lbs. of fruit that he yields.
Now, it must be noticed, that when we compare for A the utilities of fruit and fish, we are not comparing the significance of fruit-in-general with that of fish-in-general. Such a comparison clearly has no meaning for a science of human action, since nobody is ever forced to choose between two such alternatives. All that is involved in the utility comparison is the utility of the quantity of fruit that A acquires with that of the quantity of fish that he yields. These are the relevant “fruit” and “fish” involved in the comparison. To emphasize this limitation, we describe the situation for A by saying that for him the marginal utility of fruit is higher than that of fish. We are able to assert that, on A’s scale of values, the marginal utility of 10 lbs. of fruit is higher than that of 3 lbs. of fish. The significance to A of the prospective 10 lbs. of additional fruit is placed higher than the significance of the 3 lbs. of fish that are to be renounced.
When the transaction has been completed, A has successfully pursued a course of action that has substituted a more valuable package for one less valuable. He was not called upon to choose between fish and fruit. He had no need to compare fish-in-general with fruit-in-general, nor even to compare all his own fish with all his own or B’s fruit. The only choice forced on A was to compare the significance of fish and fruit at the margin. At issue was the loss of some fish as compared with the gain of some fruit. What A was called upon to decide was whether the difference to him involved in the loss of the 3 lbs. of fish meant more or less to him than the difference involved in the gain of the 10 lbs. of fruit. The fact that A chose to exchange signifies that the marginal utility to him of 10 lbs. of fruit was greater than the marginal utility to him of the 3 lbs. of fish.
We can now develop a principle of far-reaching significance in economics generally and in demand theory in particular. This principle is usually referred to as diminishing marginal utility. A clear understanding of this principle will provide the key to much of the subsequent discussion.
Imagine a man who has had to decide how much of a particular commodity to buy. Let us suppose that he was able to obtain as many units of the commodity as he pleases at a fixed price of $ P per unit and that he has finally purchased N units. We say that his action demonstrates that he prefers N units of the commodity to the amount of $ P × N, which he has to pay for them. He has chosen between the alternatives of either paying the sum $ PN (and gaining N units) or going without the quantity N of the
