WEBVTT NOTE 1.05. Further Implications: Ends and Values & The Law of Marginal Utility 1 00:00:00.000 --> 00:00:04.000 5. Further Implications 2 00:00:04.000 --> 00:00:08.000 a. Ends and Values 3 00:00:08.000 --> 00:00:14.000 All action involves the employment of scarce means to attain the most valued ends. 4 00:00:14.000 --> 00:00:24.000 Man has the choice of using the scarce means for various alternative ends, and the ends that he chooses are the ones he values most highly. 5 00:00:24.000 --> 00:00:28.000 The less urgent wants are those that remain unsatisfied. 6 00:00:28.000 --> 00:00:36.000 Actors can be interpreted as ranking their ends along a scale of values or a scale of preferences. 7 00:00:36.000 --> 00:00:42.000 These scales differ for each person, both in their content and in their orders of preference. 8 00:00:42.000 --> 00:00:46.000 Furthermore, they differ for the same individual at different times. 9 00:00:46.000 --> 00:00:57.000 Thus, at some other point in time, the actor mentioned in section 2 above might choose to go for a drive or to go for a drive and then to play bridge. 10 00:00:57.000 --> 00:00:59.000 The Theory of Money and Credit 11 00:01:27.000 --> 00:01:41.000 First, one, going for a drive. Second, two, going to a concert. Third, three, playing bridge. Fourth, four, continuing to watch baseball game. 12 00:01:41.000 --> 00:01:52.000 The choice of which ends to include in the actor's value scale and the assignment of rank to the various ends constitute the process of value judgment. 13 00:01:52.000 --> 00:02:00.400 Each time the actor ranks and chooses between various ends, he is making a judgment of their value to him. 14 00:02:00.400 --> 00:02:07.200 It is highly useful to assign a name to this value scale held by all human actors. 15 00:02:07.200 --> 00:02:12.000 We are not at all concerned with the specific content of men's ends, 16 00:02:12.000 --> 00:02:18.000 but only with the fact that various ends are ranked in the order of their importance. 17 00:02:18.000 --> 00:02:27.000 These scales of preference may be called happiness, or welfare, or utility, or satisfaction, or contentment. 18 00:02:27.000 --> 00:02:31.300 Which name we choose for the value scales is not important. 19 00:02:31.300 --> 00:02:37.100 At any rate, it permits us to say, whenever an actor has attained a certain end, 20 00:02:37.100 --> 00:02:44.400 that he has increased his state of satisfaction, or his contentment, happiness, etc. 21 00:02:44.400 --> 00:02:57.400 Conversely, when someone considers himself worse off and fewer of his ends are being attained, his satisfaction, happiness, welfare, etc. have decreased. 22 00:02:57.400 --> 00:03:07.400 It is important to realize that there is never any possibility of measuring increases or decreases in happiness or satisfaction. 23 00:03:07.400 --> 00:03:13.400 Not only is it impossible to measure or compare changes in the satisfaction of different people, 24 00:03:13.400 --> 00:03:20.200 People, it is not possible to measure changes in the happiness of any given person. In order for any 25 00:03:20.200 --> 00:03:26.520 measurement to be possible, there must be an eternally fixed and objectively given unit, 26 00:03:26.520 --> 00:03:32.920 with which other units may be compared. There is no such objective unit in the field of human 27 00:03:32.920 --> 00:03:40.920 valuate terms subjectively for himself, whether he is better or worse off as a result of any change. 28 00:03:40.920 --> 00:03:48.360 his preference can only be expressed in terms of simple choice or rank. Thus he can say, 29 00:03:48.360 --> 00:03:54.920 I am better off or I am happier because he went to a concert instead of playing bridge, 30 00:03:54.920 --> 00:04:01.400 or I will be better off for going to the concert. But it would be completely meaningless for him 31 00:04:01.400 --> 00:04:08.280 to try to assign units to his preference and say, I am two and a half times happier because 32 00:04:08.280 --> 00:04:11.920 Because of this choice, then I would have been playing bridge. 33 00:04:11.920 --> 00:04:14.360 Two and a half times what? 34 00:04:14.360 --> 00:04:20.560 There is no possible unit of happiness that can be used for purposes of comparison and 35 00:04:20.560 --> 00:04:23.520 hence of addition or multiplication. 36 00:04:23.520 --> 00:04:27.000 Thus values cannot be measured. 37 00:04:27.000 --> 00:04:31.800 Values or utilities cannot be added, subtracted or multiplied. 38 00:04:31.800 --> 00:04:35.960 They can only be ranked as better or worse. 39 00:04:35.960 --> 00:04:44.160 A man may know that he is or will be happier or less happy, but not by how much, not by 40 00:04:44.160 --> 00:04:46.120 a measurable quantity. 41 00:04:46.120 --> 00:04:53.360 Accordingly, the numbers by which ends are ranked on value scales are ordinal, not cardinal 42 00:04:53.360 --> 00:04:54.980 numbers. 43 00:04:54.980 --> 00:04:57.360 Ordinal numbers are only ranked. 44 00:04:57.360 --> 00:05:00.720 They cannot be subject to the processes of measurement. 45 00:05:00.720 --> 00:05:06.720 Thus, in the above example, all we can say is that going to a concert is valued more 46 00:05:06.720 --> 00:05:12.520 than playing bridge, and either of these is valued more than watching the game. 47 00:05:12.520 --> 00:05:19.120 We cannot say that going to a concert is valued twice as much as watching the game. 48 00:05:19.120 --> 00:05:27.120 The numbers 2 and 4 cannot be subject to processes of addition, multiplication, etc. 49 00:05:27.120 --> 00:05:34.720 All action is an attempt to exchange a less satisfactory state of affairs for a more satisfactory 50 00:05:34.720 --> 00:05:35.720 one. 51 00:05:35.720 --> 00:05:42.380 The actor finds himself, or expects to find himself, in a non-perfect state, and, by attempting 52 00:05:42.380 --> 00:05:48.600 to attain his most urgently desired ends, expects to be in a better state. 53 00:05:48.600 --> 00:05:54.300 He cannot measure the gain and satich of his wants are more urgent than others, and he 54 00:05:54.300 --> 00:06:24.300 The Theory of Money and Credit 55 00:06:24.300 --> 00:06:30.460 in his state of satisfaction or utility. If he has been in error and the value of the 56 00:06:30.460 --> 00:06:37.340 state that he has given up, x, is higher than the value of y, he has suffered a net loss. 57 00:06:37.900 --> 00:06:45.340 This psychic gain or profit and loss cannot be measured in terms of units, but the actor 58 00:06:45.340 --> 00:06:52.460 always knows whether he has experienced psychic profit or psychic loss as a result of an action 59 00:06:52.460 --> 00:07:02.460 An example of suffering a loss as a result of an erroneous action would be going to the concert and finding that it was not at all enjoyable. 60 00:07:02.460 --> 00:07:10.460 The actor then realizes that he would have been much happier continuing to watch the game or playing bridge. 61 00:07:10.460 --> 00:07:19.460 Human actors value means strictly in accordance with their valuation of the ends that they believe the means can serve. 62 00:07:19.460 --> 00:07:36.460 Obviously, consumer's goods are graded ends that man expect them to satisfy, thus the value placed on the enjoyment contributed by a ham sandwich or a house will determine the value a man will place on the ham sandwich or the house themselves. 63 00:07:36.460 --> 00:07:44.460 Similarly, producer's goods are valued in accordance with their expected contribution in producing consumer's goods. 64 00:07:44.460 --> 00:07:46.460 The Theory of Money and Credit 65 00:08:14.460 --> 00:08:38.740 A large part of this book is occupied with the 66 00:08:38.740 --> 00:08:47.300 The problem of how this process of value imputation can be accomplished in a modern complex economy. 67 00:08:47.300 --> 00:08:54.480 The original source of value is the ranking of ends by human actors, who then impute value 68 00:08:54.480 --> 00:09:00.640 to consumers' goods and so on to the orders of producers' goods in accordance with their 69 00:09:00.640 --> 00:09:06.100 expected ability to contribute towards serving the various ends. 70 00:09:06.100 --> 00:09:12.200 This is the solution of a problem that plagued writers in the economic field for many years, 71 00:09:12.200 --> 00:09:16.100 the source of the value of goods. 72 00:09:16.100 --> 00:09:21.140 B. The Law of Marginal Utility 73 00:09:21.140 --> 00:09:26.900 It is evident that things are valued as means in accordance with their ability to attain 74 00:09:26.900 --> 00:09:30.860 ends, valued as more or less urgent. 75 00:09:30.860 --> 00:09:38.940 Each physical unit of a means, direct or indirect, that enters into human action, is valued separately. 76 00:09:38.940 --> 00:09:45.540 Thus, the actor is interested in evaluating only those units of means that enter, or that 77 00:09:45.540 --> 00:09:50.380 he considers will enter, into his concrete action. 78 00:09:50.380 --> 00:09:58.620 Actors choose between and evaluate not coal or butter in general, but specific units of 79 00:09:58.620 --> 00:10:00.660 coal or butter. 80 00:10:00.660 --> 00:10:06.780 In choosing between acquiring cows or horses, the actor does not choose between the class 81 00:10:06.780 --> 00:10:14.620 of cows and the class of horses, but between specific units of them, for example, two cows 82 00:10:14.620 --> 00:10:17.020 versus three horses. 83 00:10:17.020 --> 00:10:23.320 Each unit that enters into concrete action is graded and evaluated separately. 84 00:10:23.320 --> 00:10:30.760 Only when several units together enter into human action are all of them evaluated together. 85 00:10:30.760 --> 00:10:37.420 The processes that enter into valuation of specific units of different goods may be illustrated 86 00:10:37.420 --> 00:10:39.640 in this example. 87 00:10:39.640 --> 00:10:45.540 An individual possessing two cows and three horses might have to choose between giving 88 00:10:45.540 --> 00:10:48.480 up one cow or one horse. 89 00:10:48.480 --> 00:10:54.360 He may decide, in this case, to keep the horse, indicating that in this state of his stock, 90 00:10:54.360 --> 00:10:58.080 a horse is more valuable to him than a cow. 91 00:10:58.080 --> 00:11:03.040 On the other hand, he might be presented with the choice of keeping either his entire stock 92 00:11:03.040 --> 00:11:06.080 of cows or his stock of horses. 93 00:11:06.080 --> 00:11:12.200 Thus, his stable and cowshed might catch fire, and he is presented with the choice of saving 94 00:11:12.200 --> 00:11:16.100 the inhabitants of one or of the other building. 95 00:11:16.100 --> 00:11:22.100 In this case, two cows might be more valuable to him than three horses, so that he will 96 00:11:22.100 --> 00:11:24.660 prefer to save the cows. 97 00:11:24.660 --> 00:11:31.060 When deciding between units of his stock, the actor may therefore prefer good x to good 98 00:11:31.060 --> 00:11:36.900 y if he must act upon his whole stock of each good. 99 00:11:36.900 --> 00:11:42.820 This process of valuation according to the specific units involved provides the solution 100 00:11:42.820 --> 00:11:48.220 Man for the famous Value Paradox, which puzzled writers for centuries. 101 00:11:48.220 --> 00:11:54.960 The question was, how can men value bread less than platinum, when bread is obviously 102 00:11:54.960 --> 00:11:57.500 more useful than platinum? 103 00:11:57.500 --> 00:12:04.780 The answer is that acting man does not evaluate the goods open to him by abstract classes, 104 00:12:04.780 --> 00:12:08.380 but in terms of the specific units available. 105 00:12:08.380 --> 00:12:14.860 He does not wonder whether bread in general is more or less valuable to him than platinum 106 00:12:14.860 --> 00:12:21.700 in general, but whether, given the present available stock of bread and platinum, a loaf 107 00:12:21.700 --> 00:12:26.700 of bread is more or less valuable to him than an ounce of platinum. 108 00:12:26.700 --> 00:12:33.000 That, in most cases, men prefer the latter, is no longer surprising. 109 00:12:33.000 --> 00:12:39.840 As has been explained above, value or utility cannot be measured and therefore cannot be 110 00:12:39.840 --> 00:12:43.240 added, subtracted or multiplied. 111 00:12:43.240 --> 00:12:48.660 This holds for specific units of the same good in the same way as it holds for all other 112 00:12:48.660 --> 00:12:50.520 comparisons of value. 113 00:12:50.520 --> 00:12:56.900 Thus, if butter is an object serving human ends, we know that two pounds of butter will 114 00:12:56.900 --> 00:12:59.980 be valued more highly than one pound. 115 00:12:59.980 --> 00:13:04.920 This will be true until a point is reached when the butter is available in unlimited 116 00:13:04.920 --> 00:13:11.340 quantities to satisfy human wants, and will then be transferred from the status of a means 117 00:13:11.340 --> 00:13:14.900 to that of a general condition of human welfare. 118 00:13:14.900 --> 00:13:22.220 However, we cannot say that two pounds of butter are twice as useful or valuable as 119 00:13:22.220 --> 00:13:24.100 one pound. 120 00:13:24.100 --> 00:13:29.980 What has been involved in this key concept of specific units of a good? 121 00:13:29.980 --> 00:13:35.340 In these examples, the units of the good have been interchangeable from the point of view 122 00:13:35.340 --> 00:13:42.660 of the actor, thus any concrete pound of butter was evaluated in this case perfectly equally 123 00:13:42.660 --> 00:13:45.340 with any other pound of butter. 124 00:13:45.340 --> 00:13:52.020 Cow A and Cow B were valued equally by the individual, and it made no difference to him 125 00:14:22.020 --> 00:14:29.180 What if a good is available in specific units, each perfectly substitutable for every other? 126 00:14:29.180 --> 00:14:35.860 The individual above had an available supply of two cows and three horses, and a supply 127 00:14:35.860 --> 00:14:38.420 of pounds of butter. 128 00:14:38.420 --> 00:14:43.860 What if one pound of butter was considered by the actor as of better quality than another 129 00:14:43.860 --> 00:14:45.500 pound of butter? 130 00:14:45.500 --> 00:14:51.920 In that case, the two butters are really different goods from the point of view of the actor, 131 00:14:51.920 --> 00:14:58.600 will be evaluated differently. The two pounds of butter are now two different goods, and 132 00:14:58.600 --> 00:15:05.660 are no longer two units of a supply of one good. Similarly, the actor must have valued 133 00:15:05.660 --> 00:15:12.540 each horse or each cow identically. If he preferred one horse to each of the others, 134 00:15:12.540 --> 00:15:19.480 or one cow to the other, then they are no longer units of the supply of the same good. 135 00:15:19.480 --> 00:15:23.540 No longer are his horses interchangeable for one another. 136 00:15:23.540 --> 00:15:30.480 If he grades horse A above the others and regards horses B and C indifferently, then 137 00:15:30.480 --> 00:15:39.040 he has supplies of two different goods omitting the cows, say, grade A horses, one unit, and 138 00:15:39.040 --> 00:15:42.040 grade B horses, two units. 139 00:15:42.040 --> 00:15:48.480 If a specific unit is differently evaluated from all other units, then the supply of that 140 00:15:48.480 --> 00:15:52.080 Good is only one unit. 141 00:15:52.080 --> 00:15:58.320 Here again it is very important to recognize that what is significant for human action 142 00:15:58.320 --> 00:16:05.800 is not the physical property of a good, but the evaluation of the good by the actor. 143 00:16:05.800 --> 00:16:10.840 Thus physically there may be no discernible difference between one pound of butter and 144 00:16:10.840 --> 00:16:17.480 another or one cow and another, but if the actor chooses to evaluate them differently 145 00:16:17.480 --> 00:16:22.120 They are no longer part of the supply of the same good. 146 00:16:22.120 --> 00:16:27.520 The interchangeability of units in the supply of a good does not mean that the concrete 147 00:16:27.520 --> 00:16:31.000 units are actually valued equally. 148 00:16:31.000 --> 00:16:38.240 They may and will be valued differently whenever their position in the supply is different. 149 00:16:38.240 --> 00:16:44.920 Thus, suppose that the isolated individual successively finds one horse, then a second, 150 00:16:44.920 --> 00:16:45.920 then a third. 151 00:16:45.920 --> 00:16:50.480 Each horse may be identical and interchangeable with the others. 152 00:16:50.480 --> 00:16:55.620 The first horse will fulfill the most urgent wants that a horse can serve. 153 00:16:55.620 --> 00:17:01.680 This follows from the universal fact that action uses scarce means to satisfy the most 154 00:17:01.680 --> 00:17:05.280 urgent of the not yet satisfied wants. 155 00:17:05.280 --> 00:17:10.220 When the second horse is found, he will be put to work satisfying the most urgent of 156 00:17:10.220 --> 00:17:12.400 the wants remaining. 157 00:17:12.400 --> 00:17:17.920 These wants, however, must be ranked lower than the wants that the previous horse has 158 00:17:17.920 --> 00:17:18.920 satisfied. 159 00:17:18.920 --> 00:17:24.600 Similarly, the third horse acquired might be capable of performing the same service as 160 00:17:24.600 --> 00:17:30.840 the others, but he will be put to work fulfilling the highest of the remaining wants, which 161 00:17:30.840 --> 00:17:35.600 however will yet be lower in value than the others. 162 00:17:35.600 --> 00:17:42.360 The important consideration is the relation between the unit to be acquired or given up 163 00:17:42.360 --> 00:17:47.800 and the quantity of supply, stock, already available to the actor. 164 00:17:47.800 --> 00:17:54.600 Thus, if no units of a good, whatever the good may be, are available, the first unit 165 00:17:54.600 --> 00:18:00.560 will satisfy the most urgent wants that such a good is capable of satisfying. 166 00:18:00.560 --> 00:18:07.420 If to this supply of one unit is added a second unit, the latter will fulfill the most urgent 167 00:18:07.420 --> 00:18:13.220 once remaining, but these will be less urgent than the ones the first fulfilled. 168 00:18:13.220 --> 00:18:18.900 Therefore, the value of the second unit to the actor will be less than the value of the 169 00:18:18.900 --> 00:18:19.900 first unit. 170 00:18:19.900 --> 00:18:26.420 Similarly, the value of the third unit of the supply, added to a stock of two units, 171 00:18:26.420 --> 00:18:29.820 will be less than the value of the second unit. 172 00:18:29.820 --> 00:18:36.460 It may not matter to the individual which horse is chosen first and which second, or 173 00:18:36.460 --> 00:19:04.260 Let us now consider a supply from the point of view of a possible decrease rather than 174 00:19:04.260 --> 00:19:08.260 of a possible decrease rather than an increase. 175 00:19:08.260 --> 00:19:12.260 Assume that a man has a supply of six interchangeable horses. 176 00:19:12.260 --> 00:19:15.260 They are engaged in fulfilling his wants. 177 00:19:15.260 --> 00:19:20.260 Suppose that he is now faced with the necessity of giving up one horse. 178 00:19:20.260 --> 00:19:29.260 It now follows that this smaller stock of means is not capable of rendering as much service to him as the larger supply. 179 00:19:29.260 --> 00:19:33.260 This stems from the very existence of the good as a means. 180 00:19:33.260 --> 00:19:53.260 This would not be true only if the good were not a means but a general condition of human welfare, in which case one less unit of supply would make no difference for human action, but in that case it would not be a good, subject to the economizing of human action. 181 00:19:53.260 --> 00:20:01.700 Therefore, the utility of x units of a good is always greater than the utility of x minus 182 00:20:01.700 --> 00:20:03.340 1 units. 183 00:20:03.340 --> 00:20:08.860 Because of the impossibility of measurement, it is impossible to determine by how much 184 00:20:08.860 --> 00:20:12.420 greater one value is than the other. 185 00:20:12.420 --> 00:20:19.060 Now the question arises, which utility, which end, does the actor give up because he is 186 00:20:19.060 --> 00:20:21.180 deprived of one unit? 187 00:20:21.180 --> 00:20:28.180 Obviously, he gives up the least urgent of the wants, which the larger stock would have satisfied. 188 00:20:28.180 --> 00:20:43.180 Thus, if the individual was using one horse for pleasure riding, and he considers this the least important of his wants that were fulfilled by the six horses, the loss of a horse will cause him to give up pleasure riding. 189 00:20:43.180 --> 00:20:49.020 The principles involved in the utility of a supply may be illustrated as follows. 190 00:20:49.020 --> 00:20:55.820 We are considering any given means, which is divisible into homogeneous units of a supply, 191 00:20:55.820 --> 00:21:01.180 each interchangeable and capable of giving service equal to that of the other units. 192 00:21:02.060 --> 00:21:07.980 The supply must be scarce in relation to the ends that it is capable of fulfilling, 193 00:21:07.980 --> 00:21:12.380 otherwise it would not be a good but a condition of human welfare. 194 00:21:13.180 --> 00:21:19.340 We assume, for simplicity, that there are ten ends which the means could fulfill, and 195 00:21:19.340 --> 00:21:24.260 that each unit of means is capable of serving one of the ends. 196 00:21:24.260 --> 00:21:31.180 If the supply of the good is six units, then the first six ends, ranked in order of importance 197 00:21:31.180 --> 00:21:36.180 by the valuing individual, are the ones that are being satisfied. 198 00:21:36.180 --> 00:21:40.800 Ends ranked seven through ten remain unsatisfied. 199 00:21:40.800 --> 00:21:47.080 If we assume that the stock arrived in successive units, then the first unit went to satisfy 200 00:21:47.080 --> 00:21:54.840 end one, the second unit was used to serve end two, etc., the sixth unit was used to 201 00:21:54.840 --> 00:21:57.600 serve end six. 202 00:21:57.600 --> 00:22:04.240 Now suppose the actor is faced with the necessity of giving up one unit of his stock, his total 203 00:22:04.240 --> 00:22:07.320 will be five instead of six units. 204 00:22:07.320 --> 00:22:13.720 Obviously, he gives up satisfying the end ranked sixth, and continues to satisfy the 205 00:22:13.720 --> 00:22:17.240 more important ends one through five. 206 00:22:17.240 --> 00:22:22.640 As a result of the interchangeability of units, it does not matter to him which of the six 207 00:22:22.640 --> 00:22:24.600 units he must lose. 208 00:22:24.600 --> 00:22:29.200 The point is that he will give up serving this sixth end. 209 00:22:29.200 --> 00:22:35.040 Since action considers only the present and the future, not the past, it does not matter 210 00:22:35.040 --> 00:22:39.020 Consider to him which units he acquired first in the past. 211 00:22:39.020 --> 00:22:43.220 He deals only with his presently available stock. 212 00:22:43.220 --> 00:22:49.460 In other words, suppose that the sixth horse that he had previously acquired, named Seabiscuit, 213 00:22:49.460 --> 00:22:52.780 he had placed in the service of pleasure riding. 214 00:22:52.780 --> 00:22:58.460 Suppose that he now must lose another horse, Manowar, which had arrived earlier and which 215 00:22:58.460 --> 00:23:03.380 was engaged in the more important duty to him of leading a wagon. 216 00:23:03.380 --> 00:23:10.740 He will still give up end 6 by simply transferring Seabiscuit from this function to the wagon-leading 217 00:23:10.740 --> 00:23:11.740 end. 218 00:23:11.740 --> 00:23:17.900 This consequence follows from the defined interchangeability of units and from disregard 219 00:23:17.900 --> 00:23:23.020 of past events which are of no consequence for the present and the future. 220 00:23:23.020 --> 00:23:29.440 Thus, the actor gives up the lowest ranking want that the original stock, in this case 221 00:23:29.440 --> 00:23:33.240 6 units, was capable of satisfying. 222 00:23:33.240 --> 00:23:38.840 This one unit that he must consider giving up is called the marginal unit. 223 00:23:38.840 --> 00:23:41.680 It is the unit at the margin. 224 00:23:41.680 --> 00:23:48.080 This least important end fulfilled by the stock is known as the satisfaction provided 225 00:23:48.080 --> 00:23:53.800 by the marginal unit, or the utility of the marginal unit. 226 00:23:53.800 --> 00:23:59.720 In short, the marginal satisfaction, or marginal utility. 227 00:23:59.720 --> 00:24:06.360 If the marginal unit is one unit, then the marginal utility of the supply is the end 228 00:24:06.360 --> 00:24:11.100 that must be given up as the result of a loss of the unit. 229 00:24:11.100 --> 00:24:17.340 In the case under discussion, the marginal utility is ranked sixth among the ends. 230 00:24:17.340 --> 00:24:22.280 If the supply consisted of four units and the actor were faced with the necessity of 231 00:24:22.280 --> 00:24:28.920 giving up one unit, then the value of the marginal unit, or the marginal utility, would 232 00:24:28.920 --> 00:24:35.380 have a rank of four. If the stock consisted of one unit, and this had to be given up, 233 00:24:35.380 --> 00:24:42.280 the value of the marginal unit would be one, the value of the highest ranked end. 234 00:24:42.280 --> 00:24:49.340 We are now in a position to complete an important law indicated above, but with different phraseology. 235 00:24:49.340 --> 00:24:56.060 The greater the supply of a good, the lower the marginal utility. The smaller the supply, 236 00:24:56.060 --> 00:24:59.180 The Higher the Marginal Utility 237 00:24:59.180 --> 00:25:04.620 This fundamental law of economics has been derived from the fundamental axiom of human 238 00:25:04.620 --> 00:25:06.020 action. 239 00:25:06.020 --> 00:25:14.220 It is the law of marginal utility, sometimes known as the law of diminishing marginal utility. 240 00:25:14.220 --> 00:25:20.700 Here again it must be emphasized that utility is not a cardinal quantity subject to the 241 00:25:20.700 --> 00:25:25.860 processes of measurement, such as addition, multiplication, etc. 242 00:25:25.860 --> 00:25:32.860 It is a ranked number, expressible only in terms of higher or lower order in the preferences 243 00:25:32.860 --> 00:25:34.800 of men. 244 00:25:34.800 --> 00:25:40.980 This law of marginal utility holds for all goods, regardless of the size of the unit 245 00:25:40.980 --> 00:25:41.980 considered. 246 00:25:41.980 --> 00:25:47.580 The size of the unit will be the one that enters into concrete human action, but whatever 247 00:25:47.580 --> 00:25:50.540 it is, the same principle applies. 248 00:25:50.540 --> 00:25:57.700 Thus, if in certain situations the actor must consider only pairs of horses as the units 249 00:25:57.700 --> 00:26:04.280 to add or subtract from his stock instead of the individual horses, he will construct 250 00:26:04.280 --> 00:26:10.400 a new and shorter scale of ends with fewer units of supply to consider. 251 00:26:10.400 --> 00:26:15.940 He will then go through a similar process of assigning means to serve ends and will 252 00:26:15.940 --> 00:26:35.700 What if a good cannot be divided into homogeneous units for purposes of action? 253 00:26:35.700 --> 00:26:41.220 There are cases where the good must be treated as a whole in human action. 254 00:26:41.220 --> 00:26:45.460 Does the law of marginal utility apply in such a case? 255 00:26:45.460 --> 00:26:52.700 The law does apply, since we then treat the supply as consisting of one unit. 256 00:26:52.700 --> 00:26:59.540 In this case, the marginal unit is equal in size to the total supply possessed or desired 257 00:26:59.540 --> 00:27:01.120 by the actor. 258 00:27:01.120 --> 00:27:06.820 The value of the marginal unit is equal to the first rank of the ends which the total 259 00:27:06.820 --> 00:27:08.580 good could serve. 260 00:27:08.580 --> 00:27:15.780 Thus, if an individual must dispose of his whole stock of six horses or acquire a stock 261 00:27:15.780 --> 00:27:21.660 of six horses together, the six horses are treated as one unit. 262 00:27:21.660 --> 00:27:27.980 The marginal utility of his supply would then be equal to the first ranking end that the 263 00:27:27.980 --> 00:27:32.580 unit of six horses could supply. 264 00:27:32.580 --> 00:27:39.900 If as above we consider the case of additions instead of decreases to stock, we recall that 265 00:27:39.900 --> 00:27:47.180 the law derived for this situation was that as the quantity of supply increases, the utility 266 00:27:47.180 --> 00:27:50.860 of each additional unit decreases. 267 00:27:50.860 --> 00:27:55.220 Yet this additional unit is precisely the marginal unit. 268 00:27:55.220 --> 00:28:02.060 Thus, if instead of decreasing the supply from six to five horses, we increase it from 269 00:28:02.060 --> 00:28:08.780 five to six, the value of the additional horse is equal to the value of the sixth ranking 270 00:28:08.780 --> 00:28:12.080 end, say, pleasure riding. 271 00:28:12.080 --> 00:28:17.980 This is the same marginal unit, with the same utility, as in the case of decreasing the 272 00:28:17.980 --> 00:28:20.180 stock from six to five. 273 00:28:20.180 --> 00:28:27.300 Thus, the law derived previously was simply another form of the law of marginal utility. 274 00:28:27.300 --> 00:28:32.220 The greater the supply of a good, the lower the marginal utility. 275 00:28:32.220 --> 00:28:36.700 The smaller the supply, the higher the marginal utility. 276 00:28:36.700 --> 00:28:43.220 This is true whether or not the marginal unit is the unit of decrease of stock or the unit 277 00:28:43.220 --> 00:28:47.700 of addition to stock, when these are considered by the actor. 278 00:28:47.700 --> 00:28:53.580 If a man's supply of a good equals x units, and he is considering the addition of one 279 00:28:53.580 --> 00:28:56.940 unit, this is the marginal unit. 280 00:28:56.940 --> 00:29:03.300 If his supply is x plus one units, and he is considering the loss of one unit, this 281 00:29:03.300 --> 00:29:10.120 too is his marginal unit, and its value is identical with the former, provided that his 282 00:29:10.120 --> 00:29:15.020 ends and their ranking are the same in both cases. 283 00:29:15.020 --> 00:29:21.460 We have dealt with the laws of utility as they apply to each good treated in human action. 284 00:29:21.460 --> 00:29:25.640 Now we must indicate the relationship among various goods. 285 00:29:25.640 --> 00:29:30.260 It is obvious that more than one good exists in human action. 286 00:29:30.260 --> 00:29:35.700 This has already been definitely proven since it was demonstrated that more than one factor 287 00:29:35.700 --> 00:29:41.020 of production, hence more than one good, must exist. 288 00:29:41.020 --> 00:29:46.520 To understand the relationship between the various goods in human action, consider the 289 00:29:46.520 --> 00:29:56.920 value scales of two goods, X and Y. For simplicity, let us assume that X is horses and Y cows, 290 00:29:56.920 --> 00:30:03.400 and that the value scales representing those held by the individual are as follows. 291 00:30:03.400 --> 00:30:15.400 And Y1 is ranked highest, say Cal 1, then ends X1, X2, and X3, horses 1, 2, and 3, 292 00:30:15.400 --> 00:30:29.360 Y2, Y3, X4, Y4, X5, Y5, X6, X7, Y6, Y7. 293 00:30:29.360 --> 00:30:35.800 Now the man's value scales will reveal his choices involving alternatives of action in 294 00:30:35.800 --> 00:30:38.480 regard to these two goods. 295 00:30:38.480 --> 00:30:45.040 Suppose that his stock is 3Y cows and 4X horses. 296 00:30:45.040 --> 00:30:50.960 He is faced with the alternative of giving up either one cow or one horse. 297 00:30:50.960 --> 00:30:57.360 He will choose the alternative that will deprive him of the least valued end possible. 298 00:30:57.360 --> 00:31:02.720 Since the marginal utility of each good is equal to the value of the least important 299 00:31:02.720 --> 00:31:09.680 end of which he would be deprived, he compares the marginal utility of X with the marginal 300 00:31:09.680 --> 00:31:18.800 utility of Y. In this case, the marginal unit of X has a rank of X4, and the marginal unit 301 00:31:18.800 --> 00:31:29.420 of Y has a rank of Y3. But the end Y3 is ranked higher on his value scale than X4. Hence the 302 00:31:29.420 --> 00:31:36.660 marginal utility of Y is, in this case, higher than or greater than the marginal utility 303 00:31:36.660 --> 00:31:44.340 of X. Since he will give up the lowest possible utility, he will give up one unit of X. Thus 304 00:31:44.340 --> 00:31:48.740 This presented with a choice of units of goods to give up. 305 00:31:48.740 --> 00:31:55.140 He will give up the good with units of lowest marginal utility on his value scale. 306 00:31:55.140 --> 00:32:00.580 Suppose another example, that his stock is three horses and two cows. 307 00:32:00.580 --> 00:32:05.540 He has the alternative of giving up one X or one Y. 308 00:32:05.540 --> 00:32:14.040 In this case, the marginal utility of Y is ranked at Y2 and that of X is ranked at X3. 309 00:32:14.040 --> 00:32:21.480 X3 occupies a higher position on his value scale than Y2, and therefore the marginal 310 00:32:21.480 --> 00:32:28.760 utility of Y is at this point lower than the marginal utility of X. He gives up a unit 311 00:32:28.760 --> 00:32:35.380 of Y. The converse occurs if the man must choose between the alternative of increasing 312 00:32:35.380 --> 00:32:42.940 his stock by either one unit of X or one unit of Y. Thus, suppose that his stock is four 313 00:32:42.940 --> 00:32:50.840 4 units of X and 4 units of Y. He must choose between adding one horse or one cow. He then 314 00:32:50.840 --> 00:32:57.420 compares the marginal utility of increase, that is, the value of the most important of 315 00:32:57.420 --> 00:33:05.620 the not yet satisfied wants. The marginal utility of X is then ranked at X5, of Y at 316 00:33:05.620 --> 00:33:14.500 Y-5. But X-5 ranks higher than Y-5 on his value scale and he will therefore choose the former. 317 00:33:14.500 --> 00:33:21.300 Thus, faced with the choice of adding units of goods, he will choose the unit of highest marginal 318 00:33:21.300 --> 00:33:29.140 utility on his value scale. Another example. Previously, we saw that the man in a position 319 00:33:29.140 --> 00:33:35.780 A position of 4x, 3y would, if faced with the choice of giving up one unit of either 320 00:33:35.780 --> 00:33:42.000 x or y, give up the unit of x, with a lower marginal utility. 321 00:33:42.000 --> 00:33:49.740 In other words, he would prefer a position of 3x, 3y to 4x, 2y. 322 00:33:49.740 --> 00:33:56.700 Now suppose he is in a position of 3x, 3y and faced with the choice of adding one unit 323 00:33:56.700 --> 00:34:04.140 of x or one unit of y. Since the marginal utility of the increased x is greater than 324 00:34:04.140 --> 00:34:13.100 that of y, he will choose to add the unit of x and to arrive at a position of 4x3y rather 325 00:34:13.100 --> 00:34:22.260 than 3x4y. It is evident that in the act of choosing between giving up or adding units 326 00:34:22.260 --> 00:34:31.860 The Actors must have, in effect, placed both goods on a single unitary value scale. 327 00:34:31.860 --> 00:34:38.980 Unless he could place x and y on one value scale for comparison, he could not have determined 328 00:34:38.980 --> 00:34:45.020 that the marginal utility of the fourth unit of x was higher than that of the fourth unit 329 00:34:45.020 --> 00:34:46.360 of y. 330 00:34:46.360 --> 00:34:52.780 The very fact of action in choosing between more than one good implies that the units 331 00:34:52.780 --> 00:34:59.980 of these goods must have been ranked for comparison on one value scale of the actor. 332 00:34:59.980 --> 00:35:07.520 The actor may not and cannot measure differences in utility, but he must be engaged in ranking 333 00:35:07.520 --> 00:35:11.380 all the goods considered on one value scale. 334 00:35:11.380 --> 00:35:18.860 Thus, we should actually consider the ends served by the two means as ranked on one value 335 00:35:18.860 --> 00:35:41.020 scale as follows, 1, y1, 2, x1, 3, x2, 4, x3, 5, y2, 6, y3, 7, x4, 8, y4, 9, x5, 10, 336 00:35:41.020 --> 00:36:01.340 These principles permit of being extended from two to any number of goods. 337 00:36:01.340 --> 00:36:06.780 Regardless of the number of goods, any man will always have a certain combination of 338 00:36:06.780 --> 00:36:09.300 units of them in his stock. 339 00:36:09.300 --> 00:36:15.340 He may be faced with the choice of giving up one unit of any good that he might choose. 340 00:36:15.340 --> 00:36:21.260 By ranking the various goods and the ends served by the relevant units, the actor will 341 00:36:21.260 --> 00:36:27.780 give up the unit of that good of which the marginal utility to him is the lowest. 342 00:36:27.780 --> 00:36:33.940 Similarly, with any given combination of goods in his stock, and faced with the choice of 343 00:36:33.940 --> 00:36:40.180 Adding one unit of any of the goods available, the actor will choose that good whose marginal 344 00:36:40.180 --> 00:36:43.760 utility of increase will be highest. 345 00:36:43.760 --> 00:36:49.980 In other words, all the goods are ranked on one value scale in accordance with the ends 346 00:36:49.980 --> 00:36:51.880 they serve. 347 00:36:51.880 --> 00:36:57.660 If the actor has no units of some goods in his possession, this does not affect the principle. 348 00:36:57.660 --> 00:37:18.660 Thus, if he has no units of x or y in his possession and he must choose between adding a unit of x or one unit of y, he will choose the marginal unit of greatest utility, in this case, y. The principle is easily extended to the case of n goods. 349 00:37:18.660 --> 00:37:25.540 It must be reiterated here that value scales do not exist in a void apart from the concrete 350 00:37:25.540 --> 00:37:35.220 choices of action. Thus, if the actor has a stock of 3X, 4Y, 2Z, etc., his choices for adding and 351 00:37:35.220 --> 00:37:42.100 subtracting from stock take place in this region, and there is no need for him to formulate 352 00:37:42.100 --> 00:37:48.020 hypothetical value scales to determine what his choices would have been if his stock were 353 00:37:48.020 --> 00:37:57.860 6X, 8Y, 5Z, etc. No one can predict with certainty the course of his choices except that they will 354 00:37:57.860 --> 00:38:05.380 follow the law of marginal utility which was deduced from the axiom of action. The solution 355 00:38:05.380 --> 00:38:12.980 of the value paradox mentioned above is now fully clear. If a man prefers one ounce of platinum to 356 00:38:12.980 --> 00:38:19.340 To five loaves of bread, he is choosing between units of the two goods based on the supply 357 00:38:19.340 --> 00:38:20.900 available. 358 00:38:20.900 --> 00:38:27.740 On the basis of the available supply of platinum and of bread, the marginal utility of a unit 359 00:38:27.740 --> 00:38:33.020 of Platinum is greater than the marginal utility of a unit of bread.