<h2>CHAPTER 4</h2>
<h3>THE NATURE OF DEMAND</h3>
<h4>§ I. THE COMPARISON OF GOODS IN MAN'S THOUGHT</h4>
<div class="sidenote">Wants and goods must be constantly adjusted</div>
<p>1. <i>As wants differ in kind and degree, so goods differ in their power
to gratify wants.</i> This general and simple statement unites the leading
thoughts of the two chapters preceding. Confirmation of its truth may be
found in observation and experience. The purpose of this chapter is to
show how, starting from the general nature of wants and the nature of
goods, we can arrive at an explanation of the exchange of goods.
Recognizing the simple but fundamental fact stated at the opening of
this paragraph, an exchange may be seen to be a rational and a logical
result when men are living together in society.</p>
<div class="sidenote">Ripe and unripe goods</div>
<p>2. <i>Immediately enjoyable goods are the first objective things whose
value is to be explained.</i> Goods come into relation with wants in a
multitude of ways. Some things will not gratify a want until after the
lapse of a long time, as ice cut in December and stored for summer use.
Other things will never themselves directly gratify a want, but will be
of help in getting things that do; such are the young fruit trees
planted in the orchard, and the hammer that will be used to drive nails
in a house that will shelter men. Still other things are gratifying
wants at this moment, or are ready for use and will be used up in a very
short time; examples of such are the food on the table and in the
pantry, and the cigar in the pocket. All these things are called goods,
because of their beneficial relation to man's desires, but the<span class="pagenum"><SPAN name="Page_22" id="Page_22">[Pg 22]</SPAN></span> relation
is very immediate in some cases, very remote in others. The value of all
goods is to be explained, but the explanation will be more or less
complex according to the directness or indirectness of their relation
with wants. As it is the power of goods to gratify wants that alone
causes value to be attributed to them, those goods which are ripest,
which are ready to gratify wants, are nearest to the source of an
explanation. The value of unripe enjoyments must be traced to some
expected gratification as its cause or basis. In order to attack the
difficulties one by one we will, therefore, in the following discussion,
deal first with this class of ripe, consumable goods, as food, personal
services, enjoyments of any sort that are immediately available. The
explanation of these cases of value must precede that of cases in which
the relation to wants is less obvious and direct.</p>
<div class="sidenote">The law of diminishing utility</div>
<p>3. <i>As the amount of any good increases, after a certain point the
gratification that the added portions afford decreases.</i> This is called
the law of the diminishing utility of goods or of the decreasing
gratification afforded by goods. The reason for the truth of this
proposition is found in the very nature of man and his nervous
organization. Any stimulus to the nerves, however pleasant at first,
becomes painful when long continued or increased unduly. The trumpet too
distant at first for the ear to distinguish its notes, may swell to
pleasing tones as it approaches, until at length its volume and its din
may become absolutely painful. If we were to express the degree of
gratification by a curve, we should see the curve rising gradually to a
maximum, and then falling somewhat suddenly and becoming a negative
quantity, when pain, not pleasure, resulted. The same change could be
illustrated by any sensation or by any of men's activities.</p>
<p>The proposition must be understood as applying to the gratification
resulting from each added portion of the sensation. There is a maximum
point in the gratification afforded by any nerve-stimulus. A man coming
in from<span class="pagenum"><SPAN name="Page_23" id="Page_23">[Pg 23]</SPAN></span> the winter's storm and holding out his hands before the fire,
feels an intense pleasure in the grateful warmth; a few moments later,
the same heat becomes unpleasant. In winter we wish for a moderation of
the temperature; on the sultry days of summer, we think of a cool breeze
as the most to be desired of all things. Whether the temperature rises
or falls, there is a point beyond which the change is no longer an
addition to, but a subtraction from, pleasure. A man, however hungry at
first, may be made miserable if forced to eat beyond his capacity. Each
added portion of the good consumed contributes to the gratification up
to a certain point. The sum of these pleasurable sensations may be
called the total gratification, which finally reaches satisfaction or
fullness. Then begins what may be called in algebraic phrase a "negative
gratification" which, if it becomes large enough, will make the total
gratification a negative quantity. Each added portion, dose or increment
beyond a certain point reduces thus the welfare of the user. One may
have too much of a good thing.</p>
<div class="sidenote">The marginal utility</div>
<p>4. <i>Marginal utility is the gratification afforded by the added portion
of the good.</i> The marginal dose, increment, or portion is that which may
be logically considered as coming last in the case of any good or group
of goods divisible into small parts. In considering the strict theory of
the case, in order to get at the principle involved, the doses may be
spoken of as infinitesimally small. The marginal utility expresses the
importance that men attach to one unit of this kind of goods under the
particular circumstances at the moment existing, and not under certain
conceivable conditions which do not in fact exist or need to be taken
into account by the persons affected. The marginal unit of a homogeneous
supply cannot be considered to have a greater utility than any other
unit at the moment, and therefore the product of the marginal utility by
the number of units, gives the total measure of importance of the supply
then and there, and this is the value.</p>
<p><span class="pagenum"><SPAN name="Page_24" id="Page_24">[Pg 24]</SPAN></span></p>
<p>The value of goods, as has been indicated, is the measure of the
dependence felt by men on a portion of the outer world, as the condition
of gratifying their wants. From the very nature of wants, which reside
in feelings, a dependence that is not felt, a relation between things
and gratification that is not recognized, can have no influence on
value. Now, it is at this margin of supply that dependence is felt. Men
do not concern themselves about that which they have in
superfluity—unless, indeed, the excess causes them some discomfort. It
is well that they do not, for a wise direction of effort can only take
place when men think mainly of their need of things that they want, and
want most, and direct their efforts toward securing them.</p>
<div class="sidenote">From marginal utility to value</div>
<p>The diminishing utility of successive portions (doses or increments, as
they are called) may be represented by a curve of utility.</p>
<div class="figcenter"> <ANTIMG src="images/i24.jpg" width-obs="600" height-obs="386" alt="" /> <span class="caption"><i>Scale of Supply</i></span></div>
<p>The diagram is constructed on the hypothesis that a tenth unit of a
certain good would have a utility expressed as 36; a fifteenth unit of
30, etc., and that the value of the whole supply is estimated according
to these marginal units. Of course if the conditions were that "all or
none" was to be taken, the result would be different.</p>
<p><span class="pagenum"><SPAN name="Page_25" id="Page_25">[Pg 25]</SPAN></span></p>
<div class="center">
<table border="0" cellpadding="4" cellspacing="0" summary="">
<tr><td align="left">Unit of Supply</td><td align="left">Marginal Utility</td><td align="left">Value of Whole Supply</td></tr>
<tr><td align="center">10</td><td align="center">36</td><td align="center">360</td></tr>
<tr><td align="center">15</td><td align="center">30</td><td align="center">450</td></tr>
<tr><td align="center">20</td><td align="center">25</td><td align="center">500</td></tr>
<tr><td align="center">30</td><td align="center">19</td><td align="center">570</td></tr>
<tr><td align="center">40</td><td align="center">15</td><td align="center">600</td></tr>
<tr><td align="center">50</td><td align="center">10</td><td align="center">500</td></tr>
<tr><td align="center">60</td><td align="center">5</td><td align="center">300</td></tr>
</table></div>
<p>This diagram is frequently used, and it is important to guard against
some misunderstandings. The marginal unit of any given supply—for
example, ten units—is not any particular unit, it is any one of the ten
units. In the presence of nine units of the good the person or persons
find all the various wants that are dependent on that good gratified to
such a degree that the tenth unit has an importance expressed by 36. But
as this last or marginal unit of supply may be used for any of the
purposes, the importance of each and every unit likewise will be
expressed by 36. Any one of the units, when once present is, in a
logical sense, a marginal unit. When, however, it is a question of
increasing the supply, some one unit may properly be looked upon as
marginal. The dependence felt by men on the whole group is the product
of the units by the marginal utility. As the number of units increases,
the marginal utility decreases, until at length it may reach zero, and
the total value would be nothing. A point of maximum value evidently
will be found somewhere between the two extremes.</p>
<div class="sidenote">Only one marginal utility at one moment</div>
<p>Note carefully that on the one diagram are represented a large number of
marginal utilities which never exist at one and the same moment. At any
one moment there is a given number of units and there is but one
marginal utility, and this is the same for each of the units. It is
quite erroneous to say that when there are 30 units the utility of the
tenth unit is 36; of the twentieth, 25; of the thirtieth, 19. It is
equally incorrect to say that when there are 60 units the "total
utility" is equal to the area between the right angle and the<span class="pagenum"><SPAN name="Page_26" id="Page_26">[Pg 26]</SPAN></span> curve
a-g, while the value is equal to the rectangle below and to the left of
the point g. The curve from a-g but marks the height of marginal
utilities that have no existence when the supply is 30. The "total
utility," often spoken of in this connection, if it has any existence
certainly cannot be calculated. The diagram must be understood as
representing indicatively at any given moment but one marginal utility,
the same for every unit of like goods. The other perpendicular lines are
expressed in the conditional mood; they are what the marginal utility
would be were the numbers of units different.</p>
<div class="sidenote">Changing feelings changes utility</div>
<p>5. <i>Since goods possess utility only as they gratify wants, it follows
that if wants change, the utility changes.</i> Utility does not rest
unchanging in the goods as something "intrinsic," but it depends on the
relation of goods to men. This truth, unrecognized for many centuries,
is now seen to be fundamental to the whole problem of value. The
portions of a good added later do not appeal to the same man as the
earlier portions. The man has been changed by what he has enjoyed. In
changing his feelings, goods have also changed his wants. Hence, the
added portions of the good are changed in respect to their utility or
power to gratify a man's wants. Though physically and chemically,
<i>i.e.</i>, in every material way, they are exactly like the earlier
portions, they cannot have the same want-gratifying power until he again
changes, for they are not in the presence of the same feelings.</p>
<p>Wants are constantly shifting; different kinds of goods are compared in
man's thought and arranged on a scale at every moment according to their
felt utility. An increase in the amount of a good will drop the marginal
utility of the added portions down the scale of usefulness for the next
moment. When we rise in the morning, we want our breakfast; the
breakfast eaten, another breakfast does not appeal to us. Our tasks
done, we take a boat-ride or go golfing; then, appetite returning, we
are tempted to our dinner. And thus from hour to hour wants are
gratified, are altered and<span class="pagenum"><SPAN name="Page_27" id="Page_27">[Pg 27]</SPAN></span> are shifted, until, wearied with the day's
labor and pastimes, we go to rest. In a well-ordered life, in an
advanced economic society, the means for gratifying our wants as they
arise are provided in advance. The changing series of desires is met by
a changing series of goods. Life has been defined as a constant
adjustment of inner relations to outer conditions. Economic life is
therefore like physical life, a constant adjustment; and this adjustment
of goods but reflects the shifting and adjustment of feelings.</p>
<div class="sidenote">Choice is constantly shifting</div>
<p>6. <i>The substitution of goods in men's thought is the shifting of the
choice from a good that does not give the highest gratification
economically possible at the time, to another good that does.</i> The
shifting that takes place on the scale of gratification makes it
necessary for man to shift constantly his choice of goods. This again is
the problem of "economy." Waste results when goods continue to be used
to secure a lower degree of gratification, if they might be used to
secure a higher. The change of choice may be because of a change in the
man, or because of a change in the quality or the quantity of the goods;
or because of a change in the ratio at which the goods can be secured.</p>
<h4>§ II. DEMAND FOR GOODS GROWS OUT OF SUBJECTIVE COMPARISONS</h4>
<div class="sidenote">Desire may become demand</div>
<p>1. <i>Demand is desire for goods united with the power to give something
in exchange.</i> An example frequently given to show the difference between
desire and demand is the hungry boy looking longingly at the sweetmeats
in the confectioner's window. He represents desire, but not until the
kind-hearted gentleman gives him a nickel does he represent effective
demand. Desire, therefore, must be united with power to give something
in exchange before it can be called demand. It must be for something
that is attainable; yearning for something beyond reach, sighing for the
moon, is desire that never can become effective demand.</p>
<p><span class="pagenum"><SPAN name="Page_28" id="Page_28">[Pg 28]</SPAN></span></p>
<div class="sidenote">Demand the Social expression of shifting choice</div>
<p>2. <i>Demand is the social aspect of the individual man's comparison of
utilities.</i> It is the expression of the man's wish to substitute some of
his goods for some one else's goods in order to get a higher
satisfaction. This comparison is often made between two goods owned in
different quantities. When men are constantly comparing things in their
own possession, it is a short step to compare their goods with their
neighbor's.</p>
<p>Demand for consumption goods is thus the manifestation of the man's
desire to redistribute his enjoyments. In demand for goods men virtually
say: "Part of what I have I am ready to give for part of what you have."
The strength of their desire is expressed by the amount of their offer.
When he makes this comparison and this offer, man enters into a social,
economic relation with his fellows.</p>
<div class="sidenote">The limit of the exchanger's demand</div>
<p>3. <i>The law of individual demand is: The trader will reduce his stock of
a particular good to the point where its marginal utility equals that of
the alternative goods.</i> The greater the divergence in his estimates of
the marginal utilities of two goods, the more ready is he to trade the
lower utility for the higher one. Exchange is but the effort to adjust
goods to wants in the best way. The less useful (marginally viewed) is
traded for the more useful. The greater the difference, in the one
trader's judgment, between the marginal utilities of the two goods, the
greater is the maladjustment, and the greater, therefore, is the motive
to seek readjustment by means of exchange. As the quantity of the good
parted with declines, its marginal utility increases; and as more of the
other good is acquired, its marginal utility declines. The marginal
utility of the two exchangeable units must come to equilibrium in the
individual's judgment. At this point demand ceases, not because an
additional unit of the one good could afford no gratification, but
because it would afford less gratification than the other good in which
demand must be expressed to be effectual.</p>
<p><span class="pagenum"><SPAN name="Page_29" id="Page_29">[Pg 29]</SPAN></span></p>
<div class="sidenote">The Demand curve</div>
<p>4. <i>Demand thus varies at different ratios of exchange between goods,
and may be expressed graphically by a demand curve.</i> This would show for
any one man the decline of the marginal utility of each added portion of
a good, and these individual demand curves may be united into a demand
curve for a group of men. The demand curve expresses graphically what a
man would be willing to pay at each particular stage in the increase of
goods. We have here come to the very threshold of the subject of markets
and exchange.</p>
<div class="sidenote">Elasticity of demand</div>
<p>5. <i>Elasticity of demand, in the case of any good, expresses the degree
in which a change in its ratio to other goods will increase the demand.</i>
Elasticity varies for different classes of men according to their wealth
and to the cost of the goods. If strawberries are a dollar a box in the
city market, a slight fall in the price, say to seventy-five cents, will
increase the demand but slightly. But if the price is fifteen cents and
falls to ten, the increase in the demand will be marked, for the number
of consumers to whom a difference of five cents is important is then
very great. The demand for the staples is comparatively inelastic. A
certain amount of simple food is necessary to support life; an increase
in its price will not quickly check the demand. On the other hand, if
the price of staple foods falls, no very great increase will take place
in the demand.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_30" id="Page_30">[Pg 30]</SPAN></span></p>
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