The Online Library of Liberty

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• Preface
• Introduction
• Book I: Systematic and Constructive
• Chapter I: Introductory: Administration of Resources and Choice Between Alternatives. Price and the Relative Scale
• Chapter II: Margins. Diminishing Psychic Returns
• Chapter III: Economical Administration and Its Difficulties
• Chapter IV: Money and Exchange
• Chapter V: Business and the Economic Nexus
• Chapter VI: Markets
• Chapter VII: Markets ( Continued ). Interest. Tools. Land
• Chapter VIII: Markets ( Continued ). Earnings
• Chapter IX: Distribution. Cost of Production
• Book II: Excursive and Critical
• Chapter I: Margins and Their Diagrammatic Representation
• Chapter II: On the Diagrammatic Method of Representing Areas of Satisfaction and Marginal Significances 13
• Chapter III: On the Nature of Curves of Total Satisfaction
• Appendix to Chapters II. And III.
• Chapter IV: Buyer and Seller. Demand and Supply
• Chapter V: The Theory of "increasing and Diminishing Returns"
• Chapter VI: The Diagrammatic Exposition of the Law of Rent and Its Implications
• Chapter VII: Banking. Bills. Currency
• Book III: Analytical and Practical
• Chapter I: Samples of Analysis
• Chapter II: Some Further Analyses
• Chapter III: Conclusion

APPENDIX TO CHAPTERS II. AND III.

We have generally assumed that the same curve may represent, with a sufficient approximation to accuracy, both the total excess of satisfaction over payment for a given amount purchased, and also the system of relations between prices and the quantities that would be purchased. But this assumption will not always be justified.

If a man's income rises or falls, he does not increase or diminish his expenditure upon every article of consumption.27 The consumption of bread per capita is likely to be larger, not only relatively but absolutely, in a poor man's household than in a rich one's. Thus a marked diminution in a man's effective income may actually increase his purchases of bread. Now if such a practical diminution is caused by a rise in the prices of articles other than bread, there is nothing surprising in an increased consumption of bread resulting from it. But it may be that it is a rise in the price of bread itself which contracts the man's general resources, and we may then have an apparently anomalous result, for in that case a rise in the price of bread may make him buy more of it; and within certain limits he may therefore take more bread when the price is higher than when it is lower.

This, however, does not affect the principle of declining marginal significance. It still remains true that if the man were deprived of half his stock of bread he would suffer more than twice as much as if he only forfeited a quarter of it.

On the principles finally formulated on page 461, we may construct the curve of marginal significances, shewing the surplus of satisfaction over payment for any given quantity purchased at a given price. But this curve, so far from representing with approximate accuracy the curve of price-and-quantity-purchased, will be of a wholly different character from it. The latter curve will, at this point, be sloping upwards as we recede from the origin. Within certain limits the higher the price the more the quantity purchased; but this will not be because the price is higher, but because the man is poorer. This example is an emphatic warning that no curves which depend for their validity upon the condition "other things remaining equal" can be fruitfully applied to any hypothesis that covers more than a small fraction of the whole area of a man's vital experiences.

Before leaving this illustration we may note that if the rise in the price of bread is caused by a defective harvest, then, the total amount of wheat being reduced, and the consumption of a certain class of the community being increased, it is obvious that there must be a diminution of consumption in other classes of the community sufficient to cover both the deficiency in the crop and the extra consumption; and that means that the poor would outbid the rich for bread to a certain point, as they already completely outbid them for tripe.

If it is true that for a large proportion of the community the curve of price-and-quantity-consumed really has this rising slope in the neighbourhood of the actual supply, it seems possible that the poor may be forced deeper into this disastrous necessity of outbidding the rich as an incidental consequence of "corners" in the wheat-market manœuvred for financial purposes.

There is another case in which portions of a curve of marginal significance will entirely fail to coincide with the curve of price-and-quantity-purchased. We have seen that some curves of marginal significance rise in the region near the origin. Fig. 18 represents such a case. For any price, Oy, the figure suggests that there are two possibilities of purchase, Ox₁ and Ox₂. But a moment's reflection will shew that the earlier portion of the curve cannot be interpreted in this way. To buy Ox₁ would be to sacrifice yx₁ and only to gain Ozp₁x₁. The curve, therefore, only begins to be a curve of price-and-quantity-purchased after the point k, at which the total area of the price would equal the total significance of the commodity.

[27.]Cf. page 483.