“The More, The Better?”—How This Is Not True from Economics’s Perspective

Now, imagine the following scenario: you have finally finished your class and decide to award yourself with a cold drink at Starbucks. But you soon you discover yourself crushed within a crowd had the same plan. The wait time, already arduous, slows down as you desperately want your drink. At that moment, a though occurs to you: I would be better off owning my own little Starbucks and producing as many of my favorite I desire everyday.

Having a personal Starbucks would solve your problem, and you would definitely enjoy your first several drinks. But does consuming more necessarily correlate to increasing your happiness?

It makes sense that you would be elated at the beginning, but consumption of more and more drinks will eventually transform your favorite drink to a drink that can no longer provide you as much happiness as it used to. This phenomenon is called “Diminishing Marginal Utility” in economics and can be observed all around us in our daily lives.

By definition, this means “all else equal, as consumption increases, the marginal utility derived from each additional unit declines”. The more units of drink you purchase, the additional happiness you gain would gradually decrease.

Specifically, we can plug in numbers to make it clear:

Suppose that the first drink you get can provide you with 10 total utility. As your consumption increases, the total utility and marginal utility you get would be listed as below:

Correspondingly, we can draw our results on a graph:

The graph represents how each additional utility acquired diminished for one extra drink we purchase. The curve might even further slope downward depening on the situation, for instance, if you start feeling repulsed by your favorite drink.

You–as a consumer–exprience this phenomena, but producers also face a similar issue called “Diminishing Marginal Return.” Considering that Starbucks is so popular, as an owner, you might want to increase the efficiency of your labor so that consumers’ impatience at waiting in line can be pacified. And more importantly, you could gain more profit. Such being the case, you probably want to buy more machines to facilitate the production. However, once again, more does not necessarily mean the better. The efficiency would not be increased if your Starbucks has 5 employees operating 50 machines at the same time. Instead, economists would argue that the additional unit of factors of production (in our case, the machines) would lead to a smaller increase in output after the optimal level is reached.

Taken a step further, marginal utility in real life can also be detected by a psychological approach. As pointed out by Tony Samson, “If you come in from the blazing heat, … sitting back in an air-conditioned van with the cool pleasure offered in the first minute is almost sensual. But as soon as the body adapts to the new climate, the feeling of joy slowly dissipates.” The initial relief from the heat will bring you much more utility than when you have already been cooled down.

Now the next time you wait in line at a Starbucks, perhaps you can employ an economist’s perspective with you and discover the beauty of knowledge hidden in daily life.

Sources:

https://www.investopedia.com/terms/l/lawofdiminishingutility.asp

https://www.investopedia.com/terms/l/lawofdiminishingmarginalreturn.asp

https://www.bworldonline.com/can-there-be-too-much-of-a-good-thing/