A man walks into a store and buys a bottle of water for two dollars. He has more than two dollars left, and the store has more bottles to sell but the man does not buy another bottle. Observation of the transaction suggests that the man values the bottle of water more than the two dollars he forgoes to acquire it. Yet, despite the possibility of repeating the transaction on identical terms, he chooses not to do so. While it makes intuitive sense that someone doesn’t spend all their money instantly on multiple quantities of the same item, the issue still remains that he prefers a bottle of water to two dollars and then doesn’t afterward. Cases arise often where one would prefer a definite quantity of an item and no more, even if the price of the item in question did not change.
To reconcile this issue, it is important to note what a specific transaction implies. In the course of buying the bottle of water, the man does demonstrate a preference for what he purchases over what he pays for it. However, he also demonstrates an “opposite” preference by forgoing an identical transaction later on. If every bottle of water were valued equally by the actor, then observing one purchase should imply willingness to repeat that purchase indefinitely. Since this does not occur, the valuation of successive units must differ.
Although each water bottle is physically identical, their value to the man is not the same. The man and the shop are not transacting on classes of goods but rather on individual items. The first bottle of water may cure his thirst while the second may only hydrate him further. He can value the former at greater than the two dollars he pays, but also not value the latter as such. There may be greater utility in holding on to the cash for the future or he may already have another preferred use in mind.
The principle behind this is that of diminishing marginal utility. The value assigned to means is derived from our ends. If an item satisfies an urgent need, it is valued more than an item that satisfies a less urgent need. Since the first bottle satisfies a more urgent need according to the man’s subjective valuation, he values it more than the second bottle that he can acquire because of diminishing marginal utility. Value arises as a result of our minds imputing value to means that are instrumental in achieving desired ends. Thus, despite items being physically homogenous, they may differ in value to the user.
While it has been demonstrated that the bottles of water differ in valuation, the money the man uses to pay for them also differs in valuation due to diminishing marginal utility. If the man gains a few more dollars, then he may choose to buy the second bottle due to his advanced capability to achieve more of his ends. On the other hand, if he were to lose a few dollars, he may refrain from even buying the first bottle if there were more urgent needs than quenching his thirst.
The apparent contradiction of not making identical transactions is resolved as the value imputed to the items is not identical. When an exchange is observed, the preferences that are revealed pertain only to the specific items in the exchange. They cannot be used to justify generalities such as “water is more valued than money.” Value is never attached to “water” or “money” as abstract categories or whole classes of goods. Action always concerns concrete units available to an actor at a particular moment. Parties in a transaction interact and trade until they believe that there are no further exchanges that would be mutually beneficial. If either, or both, parties believe further exchange would not help achieve desired ends, then they must necessarily value what they currently have over what they may gain from exchanging it. Marginal utility helps explain why we buy definite amounts rather than exchange until we run out of money with which to trade.
