Oct 222012
 

Last week I wrote about how people spend over $3,000 a year on impulse shopping. If we wish to spend less money and time, but still add value to what we purchase we have to understand how the passing of time will affect our perceptions of what we buy. Maybe you’re smart and are already doing this (^_^) But did you know that economists have a term for this?  Marginal utility is how satisfied we become with each additional use of a product over and over again.

For example after a rigorous #PFWorkout , we would probably be thirsty.  So drinking a glass of water would be very satisfying ヽ(´ー`)┌ But if we then drank another glass of water, it wouldn’t be as refreshing as our first. And if we continued to drink a  third glass, the satisfaction would be even less.  This is called diminishing marginal utility; when something gives us less pleasure each time we use it 🙁 Another example is leasing a new vehicle because the new-car feel and smell diminishes each time we drive it, yet our monthly payments don’t change.

On the other hand, learning to golf at first might be frustrating, difficult, and not very fun. But the more you golf and the longer you keep practicing the better you will get and the more fun you will likely have. Same can be said about other skills too like cooking. When children plead to their parents “Please, just ONE more level,” they are getting increasing marginal utility from their video game, because they feel that each additional level is more fun than the previous one.

Economists use marginal utility to determine how much of a product or service a consumer will buy. But we are not economists. We are consumers, savers, and investors. So here’s how we can use marginal utility to help make the most of our spending decisions. Whenever we are about to purchase something, we can ask ourselves what kind of marginal utility does this item have for us, diminishing or increasing? If it gives us more pleasure over time then that’s good because it adds value to our lives! Like purchasing stocks that pay dividends and starts to DRIP after a certain number of shares is reached,  or wine which tastes better as it ages, or collectibles. Everyone’s definition of utility is different, so learn what yours is.

Please don’t make the mistake of buying a new pair of shoes falsely believing that the joy you feel at the time of the purchase will last for many years.  Some individuals fool themselves into thinking Wow, only $149.95. Regular price is $250. I gotta have this. I’ll make sure to wear it a lot. when the reality is that they’ll wear it less than 10 times, probably forget about them in the closet, and then give them away many years later.

But unlike those people, we’re smarter. We know to factor in the diminishing marginal utility into the price. Honestly ask ourselves will the novelty eventually wear off,  and then finally decide if it’s worth our money. If it’s still worth the price tag then buy it, otherwise keep your money.  I’ve spent so far about $100 on clothing this year by thinking this way. I have a pair of nice shoes for when I go out with acquaintances,  but for work and casual walks I just wear them cheap $25 sneakers from Costco because they’re cheap, comfy, and fortunately my job doesn’t involve meeting with clients :0)

 

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14 Comments on "Marginal Utility"

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Pauline
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I agree with the reasoning, although I would buy better everyday shoes, since I wear them every day. I want my feet to be well and something that will last for a long time. My favorite shoes are also kind of sneakers, they were around $100 and I have worn them almost daily for 7 years, so cost per use is ridiculously low.

Liquid
Admin

Must be really good quality shoes. If they are still your favorite then that means you are getting some very good utility out of them so that’s totally worth it 😀

Leslie Beslie
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Leslie Beslie

From a psychological stand-point, the “get” is rarely as exciting as the “want”. The feeling of desiring something often turns out to be more exciting than the feeling we experience when we finally obtain that desired object.

Liquid
Admin

“The lovely toy so fiercely sought hath lost its charm by being caught.” ~ Lord Byron
The fun is always in the chase isn’t it, but maybe that’s just human nature ಥ_ಥ

Phil
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Phil
It’s funny, but when I worked for a large, global power tools manufacturer, we used to design certain products with this in mind. high volume gift items or items that appealled to the impulse of people, might get heavily used at first, until the novellty wore off or it’s marketed usefulness was tiscoved to be not as effective as manual methods. So we used to establish a user profile that would mirror this say 10 uses in month 1, 7 uses month 2, diminishing to 1 or 2 uses over the next year, until it was shelved or put in a corner… Think of all those innovative highly marketted prodcuts you recieve as gifts that rarely get used. Those are the type of companies you want to invest in. Mega Brands which creates toys for kids is a good example of this type of prodcut marketted to kids. No for those thinking, but what happens if the odd person actually uses it more than the designers expected? Well that is why companies have warranty policies, and trust me, most people would not bring back a product if it cost them under $40 and it died if it was a novel… Read more »
Liquid
Admin

Lego has become a worldwide brand, they’ve really done a good job with this strategy. The user profile you guys made sounds like most of my friends who play the Wii. Nintendo does well at hyping up their games and peripheral gadgets. They’ve sold more current generation consoles than Sony’s Playstation 3 or Microsoft’s Xbox 360, and is most profitable because their hardware is cheaper to manufacture. A lot of good things can happen when engineers, analysts, and marketers collaborate 🙂 That’s interesting about the feature that was designed not to work, lol. I’ve heard a rumor that some light bulbs are designed to burn out right after the warranty, but it’s hard to fathom how something so precise can be engineered and fabricated ಠ_ರೃ

John S @ Frugal Rules
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John S @ Frugal Rules

I agree with the previous comment of the want being much more exciting than the need. That said, I tend to spend a little more on something like shoes because I want them to last. I tend to wear sandals and I buy a decent pair that will last. The ones I wear now are over five years old, so it drives down the cost per use.

Liquid
Admin

That seems to fit the mindset of many people 🙂 quality is better than quantity. Maybe I’ll head down to the US next time and visit some of those outlets for a change. I’ve heard decently priced shoes in your country is a lot cheaper than in Canada 😀

Matt
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Matt

Marginal Utility eh? Never heard of the term ’till today but seems like something I really should have learnt in school. Seems like an effective method of fighting our “cravings” to buy that shiny new thing.

Liquid
Admin

A lot of us already think about this on a daily basis, now we can just put a name to it They should really have more lessons in school about personal finance in general. I think they discuss marginal utility in micro econ, but that’s only if you take it in college, maybe, lol.

DebtGirl
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I love this post!! It is so timely for me. Right now I am learning to spend less, track my spending and actually live within a budget for the first time in my life. It is a hard lesson for some of us. I love knowing about marginal utility because I can STOP and think about my purchase and if it will be worth it or not. Usually not!

Liquid
Admin

Those worksheets you obtained does appear to reflect the idea of utility in economics. I wonder if the course is open to anyone who wants to take it, I’m interested to try it out, lol. They say humans are the only animals smart enough to process how our actions today will impact our lives in the distant future. Everyone should be doing this already; stop and think about the next purchase. Good luck with your new budget :0)

mochiandmacarons
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mochiandmacarons

Wait, I AM smarter? -_-

I don’t think I am as smart to think about it like that all the time on a consistent basis, but I do agree that it factors in…. somewhat. My impulsive side takes over 70% of the time, so my best form of defense is NOT to see the item in the first place.

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[…] mindful of what we buy. Becoming an expert in both making money and spending money to maximize our marginal utility is the ultimate path to financial enlightenment. […]

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