Sunday, July 18, 2010

Free Samples and Diminishing Marginal Utility


Have you ever been at a grocery store and tried a free sample of some food, maybe some potato chips, and thought, "Wow! I could eat a million of these"? You then bought the product, took it home and realized after the second handful of chips that you really didn't want to eat a million of them anymore? If this has happened to you, you've helped to illustrate a very important concept in economics: diminishing marginal utility.
Diminishing marginal utility is the economic and psychological fact that in general, when people consume more of any item (not just food, but other things such as movies as I've explored in earlier articles), their desire to consume more of that item decreases. So one might really enjoy that first potato chip, but after eating a certain number of them, not want to eat any more, even to the point that one might get disgusted by the thought of eating more chips.
There are important biological reasons for human psychology to be this way. If people never got tired of eating potato chips no matter how many they consumed at one time, they would make themselves very sick. The same goes for non-food items, though perhaps to a lesser extent. I'm sure some people out there would be happy with an infinite number of shoes (Imelda Marcos or the Sex and the City girls perhaps?) Nonetheless a certain level of moderation exists in our psychology, and for some very good reasons.
Anyway, the point of my writing this article is to provide a word of advice to consumers: Know your own utility function.
For those who don't know what a utility function is, it's a mathematical or graphical representation of how much satisfaction one gets from consuming more of an item. Though I won't get into the tricky situation of trying to quantify utility, which is an abstract, personal and subjective thing, it is clear that utility diminishes with more units consumed. To make the right purchases for themselves, consumers should realize that the free sample they taste is unique. The next unit of the product will not taste the same, because utility is diminishing with every unit.
But the grocery store doesn't want you to be aware of this. The grocery store wants you to think that every potato chip will be as good as that first one, and that when making your purchase, you will think that your utility function will not decrease, as in this utility function graph:



If one's utility function were like this, every potato chip would be just as good as that first one. Grocery stores would thrive for a while, but humanity would eat itself into extinction. Thankfully this is not the case. In reality, people's utility functions decrease, like this one:





(Notice that just before 50 chips, utility is actually about to go negative. This means the person would get negative utility from more chips, probably due to physical discomfort. Not good for your stomach.)
So when you're at the grocery store and you try a free sample, remember that those tasty potato chips are hitting your taste buds at the very tippy top of your utility function. It's going to be downhill from there. And though at that moment you might feel like you can eat a million chips, if you bought these million chips, you might end up wasting 999,950 of them.

2 comments:

  1. So Alex, then how would you explain people who eat entire bags of potato chips or cookies or an entire 1/2 gal of ice cream at one sitting? Have you graphed that behavior?

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  2. Their behavior would look like the second graph but pushed farther out to the right on the horizontal axis. Even the most hardcore eaters will have a point where they would choose to stop eating, maybe at a gallon of ice cream or two bags of of potato chips. The pattern is the same just at higher quantities.

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