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 in the production of any manufactured commodity.  But the proportions in which these factors are combined together can be varied, and are frequently varied in practice as the result of the ceaseless pursuit of economy by business men.  To produce pig-iron, you need both coal and iron ore; but, if coal becomes more costly, it is possible to economize its use.  Machinery and labor must be used together, in some cases in proportions which are absolutely fixed.  But there is in nearly every industry a debated question as to whether the introduction of some further labor-saving machine would be worth while, or some improved machine which would represent the substitution of more capital plus less labor for less capital plus more labor.  A farmer can cultivate his land, to use a common expression, more intensively or less intensively; in other words, he can apply larger or smaller quantities of capital and labor (the proportion between which he can also vary) to the same amount of land.  The problem