o grasp this point when stated
in general terms. The following arithmetical example may make it
plainer:--
Suppose a merino sheep yields 9 units of mutton and 10 units of wool.
Suppose a crossbred sheep yields 10 units of mutton and 8 units of
wool.
Suppose, further, that a merino sheep and a crossbred sheep each cost
the same sum, say, for convenience, L10, to rear and maintain; and
that there are no special costs assignable to the wool and the mutton
respectively, as, of course, in fact there are.
Then 10 merino sheep, yielding 90 units of mutton + 100 units of wool,
cost L100; while 9 crossbred sheep, yielding 90 units of mutton + 72
units of wool, cost L90.
Hence you could obtain an extra 28 units of wool for an extra cost of
L10, by maintaining 10 merino sheep rather than 9 crossbred sheep. The
marginal cost of wool is thus L 10/28 per unit.
Similarly 8 merino sheep, yielding 72 units of mutton + 80 units of
wool, cost L80; while 10 crossbred sheep, yielding 100 units of mutton
+ 80 units of wool, cost L100.
Hence you could obtain an extra 28 units of mutton for an extra cost
of L20, by maintaining 10 crossbred sheep in place of 8 merinos. The
marginal cost of mutton is thus L 20/28 per unit.
So long as the price obtainable for wool exceeds L 10/28, and that
obtainable for mutton does not exceed L 20/28 per unit, it will pay to
substitute merino for crossbred; and conversely. If the price of wool
exceeds L 10/28 and the price of mutton also exceeds L 20/28, it will
be profitable to expand the supply of both breeds, until as the result
of the increased supply, one of the above conditions ceases to
obtain. Conversely, if the prices of both products are less than the
figures indicated, sheep farming of both kinds will be restricted.
The resultant of the processes of expansion or restriction, and
substitution, will be that, unless one of the breeds is eliminated,
the prices of mutton and wool will equal their respective marginal
costs. These marginal costs may, of course, alter as the process of
substitution extends. For the relative cost of maintaining merinos and
crossbreds will not be the same for every farmer. Here again it is the
costs at the "margin of substitution" that matter.]
Sec.2. _Marginal Utility under Joint Demand_. On the side of demand there
exist as a rule similar possibilities of variation. _Some_ machinery,
_some_ labor, _some_ materials of various kinds, are all indispensable
|