Note 1 — Chapter V

It may be found difficult to 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, £10, 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 £100; while 9 crossbred sheep, yielding 90 units of mutton + 72 units of wool, cost £90.

Hence you could obtain an extra 28 units of wool for an extra cost of £10, by maintaining 10 merino sheep rather than 9 crossbred sheep. The marginal cost of wool is thus £ 10/28 per unit.

Similarly 8 merino sheep, yielding 72 units of mutton + 80 units of wool, cost £80; while 10 crossbred sheep, yielding 100 units of mutton + 80 units of wool, cost £100.

Hence you could obtain an extra 28 units of mutton for an extra cost of £20, by maintaining 10 crossbred sheep in place of 8 merinos. The marginal cost of mutton is thus £ 20/28 per unit.

So long as the price obtainable for wool exceeds £ 10/28, and that obtainable for mutton does not exceed £ 20/28 per unit, it will pay to substitute merino for crossbred; and conversely. If the price of wool exceeds £ 10/28 and the price of mutton also exceeds £ 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.