Book III, Chapter III: Gradations of Consumers' Demand.

§ 1. When a trader or a manufacturer buys anything to be used in production, or be sold again, his demand is based on his anticipations of the profits which he can derive from it. These profits depend at any time on speculative risks and on other causes, which will need to be considered later on. But in the long run the price which a trader or manufacturer can afford to pay for a thing depends on the prices which consumers will pay for it, or for the things made by aid of it. The ultimate regulator of all demand is therefore consumers' demand. And it is with that almost exclusively that we shall be concerned in the present Book.

Utility is taken to be correlative to Desire or Want. It has been already argued that desires cannot be measured directly, but only indirectly by the outward phenomena to which they give rise: and that in those cases with which economics is chiefly concerned the measure is found in the price which a person is willing to pay for the fulfilment or satisfaction of his desire. He may have desires and aspirations which are not consciously set for any satisfaction: but for the present we are concerned chiefly with those which do so aim; and we assume that the resulting satisfaction corresponds in general fairly well to that which was anticipated when the purchase was made.

There is an endless variety of wants, but there is a limit to each separate want. This familiar and fundamental tendency of human nature may be stated in the law of satiable wants or of diminishing utility thus:—The total utility of a thing to anyone (that is, the total pleasure or other benefit it yields him) increases with every increase in his stock of it, but not as fast as his stock increases. If his stock of it increases at a uniform rate the benefit derived from it increases at a diminishing rate. In other words, the additional benefit which a person derives from a given increase of his stock of a thing, diminishes with every increase in the stock that he already has.

That part of the thing which he is only just induced to purchase may be called his marginal purchase, because he is on the margin of doubt whether it is worth his while to incur the outlay required to obtain it. And the utility of his marginal purchase may be called the marginal utility of the thing to him. Or, if instead of buying it, he makes the thing himself, then its marginal utility is the utility of that part which he thinks it only just worth his while to make. And thus the law just given may be worded:—

The marginal utility of a thing to anyone diminishes with every increase in the amount of it he already has.

There is however an implicit condition in this law which should be made clear. It is that we do not suppose time to be allowed for any alteration in the character or tastes of the man himself. It is therefore no exception to the law that the more good music a man hears, the stronger is his taste for it likely to become; that avarice and ambition are often insatiable; or that the virtue of cleanliness and the vice of drunkenness alike grow on what they feed upon. For in such cases our observations range over some period of time; and the man is not the same at the beginning as at the end of it. If we take a man as he is, without allowing time for any change in his character, the marginal utility of a thing to him diminishes steadily with every increase in his supply of it.

§ 2. Now let us translate this law of diminishing utility into terms of price. Let us take an illustration from the case of a commodity such as tea, which is in constant demand and which can be purchased in small quantities. Suppose, for instance, that tea of a certain quality is to be had at 2s. per lb. A person might be willing to give 10s. for a single pound once a year rather than go without it altogether; while if he could have any amount of it for nothing he would perhaps not care to use more than 30 lbs. in the year. But as it is, he buys perhaps 10 lbs. in the year; that is to say, the difference between the satisfaction which he gets from buying 9 lbs. and 10 lbs. is enough for him to be willing to pay 2s. for it: while the fact that he does not buy an eleventh pound, shows that he does not think that it would be worth an extra 2s. to him. That is, 2s. a pound measures the utility to him of the tea which lies at the margin or terminus or end of his purchases; it measures the marginal utility to him. If the price which he is just willing to pay for any pound be called his demand price, then 2s. is his marginal demand price. And our law may be worded:—

The larger the amount of a thing that a person has the less, other things being equal (i.e. the purchasing power of money, and the amount of money at his command being equal), will be the price which he will pay for a little more of it: or in other words his marginal demand price for it diminishes.

His demand becomes efficient, only when the price which he is willing to offer reaches that at which others are willing to sell.

This last sentence reminds us that we have as yet taken no account of changes in the marginal utility of money, or general purchasing power. At one and the same time, a person's material resources being unchanged, the marginal utility of money to him is a fixed quantity, so that the prices he is just willing to pay for two commodities are to one another in the same ratio as the utility of those two commodities.

§ 3. A greater utility will be required to induce him to buy a thing if he is poor than if he is rich. We have seen how the clerk with £100 a year will walk to business in a heavier rain than the clerk with £300 a year. But although the utility, or the benefit, that is measured in the poorer man's mind by twopence is greater than that measured by it in the richer man's mind; yet if the richer man rides a hundred times in the year and the poorer man twenty times, then the utility of the hundredth ride which the richer man is only just induced to take is measured to him by twopence; and the utility of the twentieth ride which the poorer man is only just induced to take is measured to him by twopence. For each of them the marginal utility is measured by two-pence; but this marginal utility is greater in the case of the poorer man than in that of the richer.

In other words, the richer a man becomes the less is the marginal utility of money to him; every increase in his resources increases the price which he is willing to pay for any given benefit. And in the same way every diminution of his resources increases the marginal utility of money to him, and diminishes the price that he is willing to pay for any benefit.

§ 4. To obtain complete knowledge of demand for anything, we should have to ascertain how much of it he would be willing to purchase at each of the prices at which it is likely to be offered; and the circumstance of his demand for, say, tea can be best expressed by a list of the prices which he is willing to pay; that is, by his several demand prices for different amounts of it. (This list may be called his demand schedule.)

Thus for instance we may find that he would buy

If corresponding prices were filled in for all intermediate amounts we should have an exact statement of his demand. We cannot express a person's demand for a thing by the "amount he is willing to buy," or by the "intensity of his eagerness to buy a certain amount," without reference to the prices at which he would buy that amount and other amounts. We can represent it exactly only by lists of the prices at which he is willing to buy different amounts.

When we say that a person's demand for anything increases, we mean that he will buy more of it than he would before at the same price, and that he will buy as much of it as before at a higher price. A general increase in his demand is an increase throughout the whole list of prices at which he is willing to purchase different amounts of it, and not merely that he is willing to buy more of it at the current prices.

§ 5. So far we have looked at the demand of a single individual. And in the particular case of such a thing as tea, the demand of a single person is fairly representative of the general demand of a whole market: for the demand for tea is a constant one; and, since it can be purchased in small quantities, every variation in its price is likely to affect the amount which he will buy. But even among those things which are in constant use, there are many for which the demand on the part of any single individual cannot vary continuously with every small change in price, but can move only by great leaps. For instance, a small fall in the price of hats or watches will not affect the action of every one; but it will induce a few persons, who were in doubt whether or not to get a new hat or a new watch, to decide in favour of doing so.

There are many classes of things the need for which on the part of any individual is inconstant, fitful, and irregular. There can be no list of individual demand prices for wedding-cakes, or the services of an expert surgeon. But the economist has little concern with particular incidents in the lives of individuals. He studies rather "the course of action that may be expected under certain conditions from the members of an industrial group," in so far as the motives of that action are measurable by a money price; and in these broad results the variety and the fickleness of individual action are merged in the comparatively regular aggregate of the action of many.

In large markets, then—where rich and poor, old and young, men and women, persons of all varieties of tastes, temperaments and occupations are mingled together,—the peculiarities in the wants of individuals will compensate one another in a comparatively regular gradation of total demand. Every fall, however slight in the price of a commodity in general use, will, other things being equal, increase the total sales of it; just as an unhealthy autumn increases the mortality of a large town, though many persons are uninjured by it. And therefore if we had the requisite knowledge, we could make a list of prices at which each amount of it could find purchasers in a given place during, say, a year.

The total demand in the place for, say, tea, is the sum of the demands of all the individuals there. Some will be richer and some poorer than the individual consumer whose demand we have just written down; some will have a greater and others a smaller liking for tea than he has. Let us suppose that there are in the place a million purchasers of tea, and that their average consumption is equal to his at each several price. Then the demand of that place is represented by the same list of prices as before, if we write a million pounds of tea instead of one pound.

There is then one general law of demand:—The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or, in other words, the amount demanded increases with a fall in price, and diminishes with a rise in price. There will not be any uniform relation between the fall in price and the increase of demand. A fall of one-tenth in the price may increase the sales by a twentieth or by a quarter, or it may double them. But as the numbers in the left-hand column of the demand schedule increase, those in the right-hand column will always diminish.

The price will measure the marginal utility of the commodity to each purchaser individually: we cannot speak of price as measuring marginal utility in general, because the wants and circumstances of different people are different.

§ 6. The demand prices in our list are those at which various quantities of a thing can be sold in a market during a given time and under given conditions. If the conditions vary in any respect the prices will probably require to be changed; and this has constantly to be done when the desire for anything is materially altered by a variation of custom, or by a cheapening of the supply of a rival commodity, or by the invention of a new one. For instance, the list of demand prices for tea is drawn out on the assumption that the price of coffee is known; but a failure of the coffee harvest would raise the prices for tea. The demand for gas is liable to be reduced by an improvement in electric lighting; and in the same way a fall in the price of a particular kind of tea may cause it to be substituted for an inferior but cheaper variety.

Our next step will be to consider the general character of demand in the cases of some important commodities ready for immediate consumption. We shall thus be continuing the inquiry made in the preceding chapter as to the variety and satiability of wants; but we shall be treating it from a rather different point of view, viz. that of price-statistics.