average cost of
production would be much lower than it is if the output were reduced
to a fraction of its present volume, and if only the richer seams of
the more fertile mines were worked. Once again, therefore it is
difficult to measure the cost of production until we know the
magnitude of the demand, which in a manner, which we have still to
elucidate, clearly depends upon the utility.

If we take the problem of joint products, the conception of cost of
production fails us still more conspicuously. For what is the cost of
producing wool, or the cost of producing mutton? We can speak of the
cost of rearing sheep: but it is hardly possible to allot this cost,
except quite arbitrarily, between the two products. How, then, can we
explain the separate prices of these things by reference to cost
alone? Instances of joint production are becoming so common in the
modern world, or at least, with the growing attention to the
utilization of by-products, are assuming so much more heightened a
significance, that an explanation of price, which does not apply to
them, is a very feeble one indeed.

Sec.2. _The Law of Diminishing Utility_. Let us turn back, then, to the
factor of utility, and see if we cannot put on a more satisfactory
basis the relation between utility and price. The clue to the puzzle
is to be found in a brief reflection on the implications of the second
general law propounded in Chapter II. A rise in price, it was there
stated, will sooner or later diminish the demand. This was asserted as
a matter of fact, observed from and confirmed by experience. But what
does it signify? To what causes is this familiar fact to be
attributed? The first stage of the answer is very ample. The many
individuals, whose purchases make up the demand for the commodity,
will buy smaller quantities now that the price is higher. Possibly
some of them may cease to buy it altogether; but as a rule it would be
reasonable to suppose that most people continue to buy a certain
amount though a smaller amount than hitherto. Let us turn our
attention, then, to the individual purchaser, and ask ourselves why he
(or let us say she) acts in the manner indicated. The obvious answer
is that the more she already has of anything, the less urgently does
she require a little more of it. If she buys 6 pounds of sugar every
week when the price is 7 cents a pound, but only 5 pounds when the
price is 8 cents, she shows by her action that she does not cons