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.—Illustrations of this principle might be multiplied 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]
FOOTNOTES
[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.
[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.
CHAPTER VII
NORMAL VALUE
Natural Supply.—We have attained a law of market value, which determines the price at which a given amount of any commodity will sell, and have taken a quick glance at the influence which fixes the amount that is offered and thus furnishes a natural standard to which the market value tends to conform. At any one moment the amount which is supplied is an exact quantity, and if it all has to be sold, it will bring a price which is fixed by the final utility of that amount of the commodity. If the quantity offered for sale should become greater or less, the final utility and the price would change. Final utility controls the immediate selling price, and if that is above the cost of production, a margin of gain is afforded which appeals to producers, sets competition working, and brings the quantity made up to the full amount which can be sold at cost. The amount of the supply itself is therefore not a matter of chance or caprice. It is natural that a certain quantity of each article should be supplied, and that the price should hover about the level which the final utility of that quantity of the good fixes. "Natural" or "normal" price is, in this view, the market price of a natural quantity.