Book III, Chapter VI: What Determines Marginal Utility

Thus far we have traced the amount of value which goods possess to the amount of their marginal utility. We may, however, pursue the causes which determine value one step further back, and ask on what circumstances the amount of this marginal utility itself depends. The answer is;—on the relation between Wants and their Provision. The way in which these two factors influence the amount of marginal utility has been suggested so often and so fully in the foregoing analysis, that I need not say anything further in way of explanation. I shall content myself with shortly formulating the law relating to it. It runs thus: the more comprehensive and the more intense the want, the higher the marginal utility, and vice versâ. That is to say, the more numerous and the more intense the wants demanding satisfaction on the one hand, and the less the quantity of goods available to satisfy them on the other hand, the more important are the layers of want that must remain unsatisfied, and the higher, therefore, the marginal utility. And conversely, the fewer and the less urgent the wants, and the more goods there are to satisfy them, the deeper down the scale goes the satisfaction, and the lower falls the marginal utility and the value. It comes nearly to the same thing, only in a less precise form, to say: Usefulness and Scarcity are the ultimate determinants of the value of goods. In so far as the degree of usefulness indicates whether, in its way, the good is capable of more or less important services to human wellbeing, so far, at the same time, does it indicate the height to which the marginal utility, in the most extreme case, may rise. But it is the scarcity that decides to what point the marginal utility actually does rise in the concrete case.

This proposition, that the height of marginal utility is determined by the relations of Wants and Provision, admits of a great number of useful applications. Just now I shall only emphasise two of these, which we shall have to make use of later on in the theory of objective exchange value. First, since the relations of Wants and Provision among individuals are extremely various, one and the same good may possess an entirely distinct subjective value for different persons—without which, indeed, it is difficult to see how there could be any exchanging at all. And thus, second, under otherwise similar circumstances, the same quantities of goods have a different value to rich and poor; to the rich they have a smaller, to the poor a larger value. The rich being amply supplied with all classes of goods, their satisfaction extends, generally speaking, to the more unessential wants, and the added or deducted satisfaction dependent on any particular good is, consequently, inconsiderable; while to the poor man, who is generally able to provide for only his most urgent wants, the utility which depends on each good is much greater. Experience also shows that poor men find it a pleasant thing to acquire goods and a painful thing to lose them, where a similar gain or loss does not affect the rich at all. We would scarcely compare the state of mind of a poor clerk, who received his month's salary of £5 on the first day of the month and lost it on his way home, with that of the millionaire who dropped the same sum. To the former the loss would mean most painful privation over a whole month; to the latter it would only involve the want of some idle luxury.