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  • Ricky Li

Marginal Utility



Some people say that Coke can refill for free in the US McDonald's. Whether you buy a big cup or a small cup, you can go to an unlimited amount of refilling and continue to drink. When I first heard about this, I said that I didn't believe it. I have been to the United States many times and have eaten a lot of McDonald's. Why don't I know? It must be wrong. Later, I went to the United States. I went to McDonald's to verify it. I found out that it was tr

I was shocked, I thought if free refilling placed in Chinese McDonald's, just Coke, can shut down your business. I couldn't understand and talk to the McDonald's clerk for a long time and ask why. She couldn't give me an answer but saying this is the rule.

Later, I did some research and understood that this could explain by a fundamental concept in economics called marginal utility.


McDonald's in the United States is betting that you haven't drunk much yet; the marginal utility of Coke to you has already dropped to zero. At this time, even though they let you drink, you don't drink.

Why is it not a free refill in China? I guess, probably because Americans think that sugar is too high and unhealthy. The marginal utility of drinking two glasses is zero. Chinese people may have to drink four or five cups.


Marginal utility is the extra satisfaction that brings to you every time you consume a piece of merchandise.More than 200 years ago, Adam Smith proposed the famous "value paradox" of why diamonds are more expensive than water. Water is of great value to humankind. Without water, we will die. There are no diamonds, and we will not die. Adam Smith asked: Why is water more valuable than diamonds, but diamonds are more expensive than water?

The theory of marginal utility explains that it is because we use much water, and the "marginal utility" brought by the last unit of water is negligible. On the contrary, although the value of diamonds is not as high as water, because we buy very few diamonds, its "marginal utility" is immense.We are ultimately paying for "marginal utility." Therefore, the high price of diamonds and the low price of water are reasonable.


Example 1

Many people may have heard the story of "seven steamed buns." When you are starving, you will feel delighted when you eat the first steamed bun. Then you may feel perfect when you eat the second one. When you go to the third, fourth, and fifth, the steamed bun will lower your extra satisfaction. By the seventh, steamed bun can't bring you any more pleasure. After eating ten steamed buns, you will probably belch, that is, the satisfaction is negative.


Although the production costs of these ten steamed buns are the same, the satisfaction they bring to consumers is completely different. The desire of the person for the item will decrease as the willingness is continuously satisfied. If the number of elements is unlimited, the excitement can be fully satisfied, and the intensity of desire will be reduced to zero or even harmful. The extra satisfaction that the last steamed bun can bring to you is marginal utility.



Exam 2: Communication costs for telecommunications companies

If you are a telecommunications company, although the fee per call may be the same for you, you can try to use the "marginal utility" logic to set your price. For example, for an international call, the first minute of the request, 10 yuan, because this minute has the most utility. The second minute, 1 yuan. Starting in the third minute, 1 cent. To save money, many people have hanged up after saying the most important words. You can now pay a costly fee to this "most necessary" word, and use the "nonsense" that is declining in the marginal utility to get a little cheaper, and therefore encourage everyone to talk for a while and get more income.


Example 3: Discount in Clothing Stores

If you are selling clothes, a girl bought a gorgeous dress cost 1,000 yuan; then if she buys the second one, she only needs to pay 800 yuan. You may ask, based on what, the price of the purchase is the same, why is it cheaper? You have to think that the "marginal utility" of the second dress for this girl has dramatically reduced. She may not pay another 1,000 yuan for the reduced "marginal utility." The satisfaction of the second piece of clothing may only cost 800 yuan for her. The price is low, and the profit is little, too, but you have done more business that cannot stop.


Example 4: Declining fares for cinemas

If you are running a movie theater. A movie ticket costs 100 yuan. The second movie reduces to 50 yuan. The third movie ticket cuts to 10 yuan.

Moreover, the fourth ticket, you can watch for free. You will find that most people only watch a movie one day, and now it is possible to wait for two or three movies. The free fourth movie, because the marginal utility it brings to the audience is almost zero, or even negative, so also if it is free, there will be very few people who stay.



Summary: Understanding Marginal Utility

Marginal utility is the extra satisfaction that you give each time you consume a piece of merchandise. This extra satisfaction is continuously declining. After the desire is fully satisfied, the marginal utility is zero; thus, the goods are free.

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