How Much Pizza Is Too Much?!
Wednesday, June 2, 2010 at 10:44AM Don't forget to help support Western Mass literacy programs and the Springfield Public Libraries. Use that donate button in the left side bar!!
Today's post we are introducing an economic concept that is part of everyone's buying process - even if you don't know you know it. What I'm talking about is demand elasticity. Everyone is vaguely familiar with the supply and demand concepts of microeconomics but I'm more concerned with the drivers and motivators that get people to consume, not just the mechanics. What demand elasticity helps explain is a consumers willingness to consume when prices change. Let's take a quick second to explore an oversimplified example.
Let's say I love pizza (I mean I like it but I don't know if I would say I'm in love with it), I'm walking by a pizzeria and suddenly I have to have it inside of me. So I stroll up to the counter and it's $3.00 per slice and these are great looking slices. I'm hungry and at $3.00 it sounds steep but I buy and before I know it my slice is gone. I'm still hungry. So, I go back up to the counter, I'm not as hungry as before but I could definitely use another slice. I reach into my pockets hesitantly for another $3.00 and away we go again. I must have a high metabolism that day because at the end of that slice I'm still hungry but this time $3.00 for the same slice doesn't do it for me any more. It's not that I stopped liking pizza or that I'm full, because I can always eat, it's that to consume a third slice for the same price as the first two just won't provide me with that utility (economic measure happiness) that the first slice had. If the pizza guy said that he'd drop the price for me to $1.50/slice then I would by again. So a change in price, given my level of consumption to that point, would be enough to motivate me to buy a third slice. This is demand elasticity.
Now what, right?! We all consume and there's a part of us, some bigger than others, that love the thrill of the sale. My goal here is to get you to think in terms elasticity and how you are consuming. In my example above if there was another pizzeria across the street that produced a substitutable quality slice to the one I purchased at a price point of $1.50 I might have been willing to consume more, heck maybe even order a whole pizza. But because there wasn't I was forced to buy from there, if I wanted to satisfy my hunger pangs with my favorite food. See what's happening here, it's a subjective value dance. Elasticity is a very personal thing and is based on a few factors that everyone can relate to.
- Income - The percentage of income the consumption of a good causes. If it's cheaper, we are more likely to consume more of it because it's takes smaller percents of our income.
- Need/Urgency - I'm willing to pay more for things when time is an issue.
- Substitutes - For that pizza I could've went to the store and bought frozen, ordered delivery, made from scratch, etc. Some cheaper alternatives and some maybe not.
- Brand awareness/loyalty - You spend more because you perceive value in a brand even if there are direct substitutes. Families that have a few cars from the same maker are examples.
- Utility - What kind of intrinsic value am I deriving from consuming. People spend money on a lot of things, like art for example, not as an investment or because they need it. It's because they derive some kind of happiness from it that justifies the cost.
Then there are some things you can't avoid, like gas. There are substitutes to buying gas and driving like: public transit, biking, walking, and carpooling. But for the most part the inelasticity on gas is pretty high because as it's price fluctuates people will always need to commute and there are few substitutes to actual car fuel (As much as I would love to make my VW a vegetable oil kind of car it's just impractical).
So the next time you are out and think you need something try to think about a few things. Think about brands, substitutes, and what percentage of income (or your liquidity) that the purchase comprises of. Try to be aware of the purchases you make because creating savings is more than just cutting your spending and direct deposit. It's about smarter, more efficient consumption. In the times where the sales are too good or the utility you'll derive from having the netbook (I like my netbook, not a huge fan of the iPad still yet) are off the charts then indulge. Just try to make up for it in other places. You already work hard for what you have, so why not work smart to keep it growing. For more on being smart consumers definitely check out "Spent." It's a great read from an evolutionary psychologist about consumer behavior, some pretty cool insight I think.
Budget, Consumer Behavior, Elasticity, Spending in Behavior 
Reader Comments (4)
Most of us are often getting carried away by our urges. In effect we make some bad purchasing decisions. It is always important to be mindful of what we buy and measure it with according to its feasibility. :-)
You've go it Walter! Even just bringing that spending awareness to the forefront of your thoughts can make a huge difference and curb irrational buying behavior. Consuming has become a reflex to some people and in that reflex is where the inefficiencies in proper financial planning lay.
Great explanation (and I love the accompanying comic strip!)
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