way of expressing the choice that faced the man, while correct as far as it goes, does not fully set forth the actual complexity of the decision he has made. Our buyer, who actually buys N units, could have bought, if he had desired, either more than N units or less than N units. The full range of alternatives open to him include:
| Buying Possibilities | Cost |
| Buying none of the commodity | no money |
| Buying 1 unit | $P |
| Buying 2 units | $2P |
| . . . | . . . |
| Buying N − 1 units | $(N − 1) P |
| Buying N units | $NP |
| Buying N + 1 units | $(N + 1) P |
| . . . | . . . |
In comparing these successive alternatives one with another, the prospective buyer assesses the differences (marginal utility) that successive additional units of the commodity would make to him; and he weighs these differences against those involved in the prospective loss of successive additional sums of money. The principle of diminishing marginal utility focuses attention on the marginal utility attached to successive additional units of the commodity.
The acquisition of additional units of a commodity enables the buyer to satisfy a successively larger number of wants. The acquisition of the m th unit of a commodity by one who already possesses m − 1 units means that he will now be able to satisfy a want that, if only m − 1 units would be possessed, must have gone unsatisfied. It is clear, upon reflection, that this want whose satisfaction is made possible by the acquisition of the m th unit must rank higher on the man’s scale of values than the want that depends for its satisfaction on the acquisition of the (m + 1)th unit. For when a man acquires the m th unit, he will have to choose—out of all the wants that must go unsatisfied when only m − 1 units are possessed—that particular want whose satisfaction the acquisition of this m th unit should, in fact, make possible. And, of course, it will be the most important of these wants that will be chosen. Furthermore, of the still remaining unsatisfied wants, it will be the next most important one that will be selected for satisfaction upon acquisition of the (m + 1)th unit.
Similarly, looking at the same situation from the opposite direction, it is obvious that if the man who possesses m − 1 units were to lose one of them, then he would see to it that the want that must now go unsatisfied will be the least important of all hitherto satisfied wants. Of the remaining yet satisfied wants, it must be the next least important that would be sacrificed, were yet another unit to be lost.
To restate the contents of the preceding paragraphs compactly, we can say that the
Marginal utility of the mth unit is lower than that of the (m – 1)th unit and higher than that of the (m + 1)th unit.
This conclusion is the principle of diminishing marginal utility.
The principle readily lends itself to illustration. Consider, for example, an air passenger packing his valise and allowed to take with him baggage of only limited weight. He surveys the articles he would like to take but which weigh, let us say, 5 lbs. in excess of the limit. Clearly, the 5 lbs. of his possessions that will be excluded will be those the passenger believes to be least urgently required for the trip, among all the 5-lb. groups of articles that can be removed. Suppose that a sudden change in regulations reduces the permitted weight by 5 lbs.; then yet another 5 lbs. of articles will have to be excluded. The latter will be possessions that, while more desired for the trip than those previously excluded, are yet not as indispensable as the articles still packed in the valise. The marginal utility of allowed baggage, in terms of 5-lb. units of impedimenta, increases as the baggage allowance dwindles and diminishes as the baggage allowance increases.
Some words of clarification are in order with respect to the meaning of “marginal.” Let us imagine six physically similar shirts each bearing a different number. A man owns the shirts numbered 1, 2, 3, and 4. He contemplates the purchase of the shirt numbered 5 and then of the shirt numbered 6. His decision requires the comparison of three situations: (a) possession of shirts 1, 2, 3, and 4; (b) possession of shirts 1, 2, 3, 4, and 5; and (c) possession of shirts 1, 2, 3, 4, 5, and 6. As discussed, such comparison involves the marginal utility of “a fifth” and of “a sixth” shirt. If each shirt is priced at $5, then the decision whether or not to purchase the fifth shirt will hinge on whether a fifth shirt has greater utility than $5 or not. The marginal shirt in this case happens to be the shirt bearing number 5. And similarly for the sixth shirt.
The law of diminishing utility tells us that the marginal utility of the sixth shirt will be lower than that of the fifth. The acquisition of the fifth shirt, let us say, enables the man to fulfill a particular engagement without appearing in a soiled or frayed shirt. The sixth shirt will obviously make no difference at all to this engagement; it can affect only some other occasion, less important than this engagement.
It must be made clear that the fifth and sixth shirts, as well as each of the four already possessed, being different units of the same good, are perfect substitutes for one another. The shirt numbered 6 has lower utility than that numbered 5 only because it is to be acquired later. Once the man has bought the sixth shirt, it may well be that the shirt numbered 6 may actually be worn for the most important occasion. When we say that a sixth shirt has lower utility value than a fifth, what we actually mean then is that the utility of any one shirt, when six shirts are owned, is lower than that of any shirt in a five-shirt wardrobe. This is so because the utility of any shirt in a man’s wardrobe means simply the difference its loss would make to him. A man owning shirts numbered 1 to 6, contemplating the loss of shirt number 3, is in exactly the same position as if he would be contemplating the loss of shirt number 6. Any use shirt number 3 would be put to, were shirt number 6 to be sacrificed, can be perfectly served by one of the other shirts, when it is shirt number 3 that is to be given up. The marginal utility of any one particular unit in a stock of shirts, or any other good, even the marginal utility of the unit devoted to a more important use than any of the other units, is exactly the same as the marginal utility of the unit devoted to the least important use—since it is this least important use that is at stake.
This rather obvious fact can be fruitfully borne in mind throughout economics whenever the adjective “marginal” appears.
THE MARGINAL UTILITIES OF RELATED GOODS
It is useful for many purposes to distinguish between goods that, for a given consumer, are unrelated and goods that are related. Unrelated goods are those whose marginal utility depends only on the quantity of it possessed, not on the quantity possessed of the others. Related goods, on the other hand, are any group of goods whose marginal utility depends, in some way, not only on the quantities of the good itself possessed, but also on the quantities possessed of the other goods in the group.
The relationship between related goods can be one of two kinds. Related goods can be either complementary to one another or substitutes for one another.
