This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 1. Quality, a reflection of desire. § 2. Substitution of goods. § 3. The principle of substitution. § 4. Substitution of like and of unlike goods. § 5. Complementary goods. § 6. Changes of desires and of valuations. § 7. Effect of repeated stimuli on our feelings. § 8. Different quantities and corresponding desires. §9. Stock of homogeneous units: principle of indifference. § 10. Diagram of marginal valuation. § 11. The paradox of value.
§ 1. Quality, a reflection of desire. Our task now is to explain - in the case of present, directly enjoyable goods - the elementary principles of valuation. We have already seen that things have inherent physical and chemical qualities which are quite beyond the power of man to change. We can go further than this and say that no two objects are exactly alike. Each object is in an extremely literal sense a "unique." "Alike as two peas" means merely so near to likeness that the eye cannot detect the difference. The differences are minute, and for many practical purposes quite negligible. It is such a degree of likeness for practical purposes which we have in mind when we speak of a " grade" of goods, and (somewhat inconsistently) of "like" goods having different qualities. Thus all apples may be spoken of as being "like" goods. They are alike botanically; they are also alike to a degree in the uses to which they are put. There are, nevertheless, different varieties of apples, and the apples of a given variety may always be "graded" - according to size, or to color, or to degree of perfection - when the grower uses them himself or prepares them for the market. These differences are inherent in the apples themselves. When, however, we speak of apples of "good quality" or "bad quality," we mean simply that we desire the so-called good ones more than the so-called bad ones. As between two apples, the one which we desire the more is spoken of as of "good" or "superior" quality. But plainly the goodness or the superiority lies in the relation to our desires. So that quality is partly a matter of inherent differences, and partly a reflection of our desires. Thus if (in Fig. 3) 1, 2, 3, and 4 are apples which are practically alike except in one particular - sweetness, for example
FIG. 3. GRades or Goods and Corresponding Values.
The shading of the circles indicates differences in physical qualities of objects, as in color, in sweetness, etc. Corresponding with these differences the values, represented by the columns, range from high to low. If the tops of these columns be connected by a line, its distance above the base line indicates the valuation of each in terms of any one of the others. and if we have a preference for sweet apples we are likely to rank them as to value according to their sweetness.
§ 2. Substitution of goods. If now we have an abundance of apples of the greatest sweetness or best flavor, those of inferior quality will make little appeal to our desires. The best apples have a high value; the poorest have little or none. Because of their abundance, or the abundance of the better grades, the apples of inferior quality may even be free goods, lacking in value because not in the smallest degree the objects of desire. If, on the other hand, apples of the finest flavor are few in number, those of the next best grade will become objects of desire, and will therefore have a value for us. We come in this way to attach different values to the different grades. This act of resorting to objects of inferior quality because of the scarcity of the better grades, is substitution of goods. It is but the objective aspect of the shifting in our desires. It is a simple matter, but it has its bearing on the general problem of value. The thing that is fundamental in the valuation of different grades of things is the connection between these various grades and the desires of men.
In some years, when the difference in quality between the grades of apples is marked and there is a large crop of the best grade, the small, knotty apples are free goods in the orchards, and are allowed to rot on the ground. In other years, when good apples are scarce, the poorer grades are gathered and are sold at good prices. But if there is an abrupt difference in quality between two grades, the value of the better grade may rise considerably before there is any use made of the poorer. The slighter the difference in quality the more quickly appears the effect of the presence of the lower grades in limiting the increase of value of the higher grades.
§ 3. The principle of substitution. Substitution of goods in the simplest case occurs where an individual is distributing two or more goods or kinds of goods to different uses. His object is to gratify his desires to the maximum, by economizing the more valuable goods and making the less valuable goods serve some of the same purposes. This may be expressed as a general principle of substitution as follows: goods of kinds and of grades the most valuable are applied to the more urgent uses they are capable of meeting, and less valuable goods are brought in to take their place (substituted) up to the point where the value of each use and the value of the good applied to it are equal.
No grade can be said to be the cause of the value of the others. There is an independent reason for the attaching of value to each grade of goods. Each grade would have value if there were none of the other. But they mutually affect each other's value when they exist side by side. The value of each is lessened by the presence of the other. And thus two or many grades constitute for many purposes a single group of goods which shade gradually into each other by the shifting of choice.
§ 4. Substitution of like and of unlike goods. The cases of substitution most easily called to mind are between goods very nearly alike in physical nature and used for the same general purpose: cotton and wool for clothing; fish and venison, or peaches and pears, for food; candles and petroleum for light; stone, brick, and wood for house building; horses, mules, and oxen for hauling. But cases may be found which range in almost unbroken series in either direction - towards the substitution of practically like goods on the one hand and towards the substitution of most unlike goods on the other. One may go without overshoes to get books, without candy to go to the theater, without adequate food to get an education.
§ 5. Complementary goods. Some goods, however, instead of being substitutes have a complementary relation to each other. Two or more kinds of economic goods are said to be complementary when either one, instead of taking the place of the other, enhances its desirability. The one complements (fills out, completes) the other. Cases occur where the one good is entirely useless without the other, as the two gloves of a pair, a gun without powder, fuel without flame to light it, etc. In another class of cases the one is still of some value, but of less value, without the other, as salt in the food, one of a finely matched pair of horses, etc. In one way or another and at various times, a great many most unlike goods may become linked together in choice by this complementary quality. This gives rise to interesting, sometimes puzzling, problems of valuation. A group of complementary goods is valued as a whole; but if one part is missing the rest may be worth nothing, and a part may for the moment be worth as much as the whole. If a good in one of its possible uses is highly complementary, perhaps indispensable to another good, it will be valued for that use, and a substitute found in other uses. Economics is full of problems of complementary goods.