All free-market exchanges are based on a reverse inequality of values. The diagram at right depicts Crusoe's and Friday's value scales and stocks prior to trading. Crusoe owns the only cow on the island, while Friday owns the only horse. Their value scales with respect to these two goods are mirror images. Crusoe would attach greater subjective utility to a horse than to his cow. Friday is in the reverse situation, valuing a cow more highly than a horse. Therefore they effect an exchange, enabling both of them to move to a level of higher subjective value. (Human beings, of course, always act to maximize their subjective value.) Who gets the "better end" of the deal? Clearly, they both do—for a free-market exchange has (at least) two "better ends."

Crusoe

horse

cow
stock:
one cow

Friday

cow

horse
stock:
one horse

In this exchange, 1 horse is the price that Crusoe asks for his cow and represents the cost of the cow to Friday. Similarly, 1 cow is the price asked by Friday, representing a cost for Crusoe. In this example we deal with only one unit of each good. In later analyses, we shall always understand that "price" means per-unit price, while "cost" means per-unit cost.

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