Tuesday, June 3, 2014

Learning economics through pictures - diminishing marginal utility "fail"

Hat tip to Susquehanna University student Courtney Conrad.

This picture is a joke (I hope), but it allows us the opportunity to talk about diminishing marginal utility.  This promotion doesn't recognize it.

The idea of diminishing marginal utility is that consumers will value a 2nd item less than the first item.  One good example: What's more important, a family's first car or their second?  It's naturally the first car.  Without the first, the family can't use a car at all.  Going from one to two can be incredibly helpful, as two people can drive at once, but it's not as important as obtaining the first vehicle.  The same concept holds when discussing the first and second pieces of pizza, televisions in a house, and almost all items.  That's why economists call it the law of diminishing marginal utility.

Usually, "buy one, get one 50% off" promotions are done because firms recognize that a 2nd unit is not worth as much to the consumer.  The promotion pictured above doesn't recognize the law of diminishing marginal utility.

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