It's an economic principle I am acutely aware of, given my frugal tendencies. I was trying to teach my son about marginal utility tonight. He's 11. And a bit of a comedian. Neither of which lends itself that well to a lesson.
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Whether you know it or not, you already understand marginal utility. It's the concept that leaves you happy when you pay $2.00 for your morning cup of coffee, but start to cringe when Starbucks charges you $3.50 for that same cup, but you pay it because its closer to your house. Or makes you think "I can drink water" when you go to a fru fru hotel and room service is charging $6.00 for that same cup.
Each person has a value attached to certain objects (needs or wants) and we make buying decisions around that. And its all relative - not absolute. So for example, when the DVD you want is at Best Buy for $24.00, but you know if you got in the car and drove to Wal-Mart, you could pay $20.00 . . . well, you buy it at Best Buy because you're there and its worth it. But you won't pay that extra $4.00 for the coffee.
I have a marginal utility of about $30 for a skirt. I'm a seamstress. I sew. I know how much work goes into making a skirt. Unless it is going to massage my ass while I work all day, there is nothing I can pay for over $30 that I can't really get at the $30 level. My marginal utility of a massage is much higher, and I've paid upwards of $120 for a good rub down. Can't put a price on that little piece of heaven. But I won't pay more than $2.00 from a hotel vending machine for a Diet Coke unless I'm seriously desperate.
If you play poker, you make decisions on marginal utility all the time . . . although we call it "pot odds" or "being priced in" - there is a certain economic point where its worth it to pay the asking price (the bet), and a certain point where you say "absolutely not."
* * * * *We are at dinner tonight, when the topic arises (read, I bring it up).
- Mrs Chako: Son, do you know what marginal utility is?
- Son #1: Ummmm . . . huh?
- MC: How much does a McDonald's cheeseburger cost?
- #1: Ummm . . . $1.00?
- MC: Right. So if I told you that I had a cheeseburger that tasted just like McDonald's and wanted to sell it to you for $1.00, would you buy it?
- #1: But I like McDonalds.
- MC: But this tastes just like McDonalds.
- #1: Ummm . . . ok, yeah.
- MC: What if I said it was $1.50?
- #1: From McDonalds?
- MC: Doesn't matter.
- #1: Yes it does. I like McDonalds. Where are the McDonalds? What happened to the McDonalds?
(moments of refocusing)
- MC: So now, would you pay $10?
- #1: (Looks at father like "save me") Ummm . . . no.
- MC: Right. Because your marginal utility is closer to $1.00.
- #1: (Nods head.)
- MC: Now what if you were in the desert and starving and I said I had a cheeseburger and I said you had to pay me $10.
- #1: If I was in the desert and starving and you came up and said "I have a cheeseburger, pay me $10", I'd think you were a mirage.
- MC: I'm not a mirage.
- #1: Well, ok, then I guess I'd pay, because I was starving. If I had money in the desert.
- MC: Ok, so your marginal utility for the cheeseburger went up because you were starving . . .
- #1: What's your point?
- MC: So let's think about Ferrari's (looks at Dr. Chako). Why would you buy a Ferrari when you could get two really nice cars for the same price?
- #1: What kind of cars?
- MC: Heck, you could get three minivans for the price of a Ferrari.
- #1: What would you do with three minivans?
- MC: Its not important what you would do with them or whether you would buy three. The point is that for the same money you could have three vehicles.
- #1: If you could afford a Ferarri, why would you want three minivans?
- MC: That's not the point - its that you COULD have three minivans?
- #1: If you could afford a Ferarri, why wouldn't you just get a Lamborghini instead?
- MC: You're not getting this concept.
- #1: I love Lamborghinis.
* * * * *Some day he will thank me. Right now he's thinking about specs on a new Murcielago. Go figure.
Sometimes I wonder if he's my kid at all . . .