Fascinating economy. Larissa Zaplatinskaia
hard at your job, you might get rewarded with a bonus or a pay raise. Your employer is giving you a monetary incentive to work hard. If your hard work earns an extra week of vacation instead, that is a nonmonetary incentive. Because utility is a person’s satisfaction, an incentive can raise utility whether it is monetary or nonmonetary.
Incentives increase the possible benefits of a decision. As such, they affect the cost-benefit analysis a consumer might make.
Most people would agree that a bonus is a better incentive than a pat on the back.
What Drives You?
When you look at opportunity costs, you consider monetary and nonmonetary incentives.
If you reduce your part-time work hours to do volunteer work in your field of study, you will decrease your monetary benefits but probably increase your nonmonetary benefits. The volunteer work helps others and makes you feel good. This decision could also have a monetary effect; the experience you get from volunteering might help you get a better paying job in the future.
Untangling and calculating the monetary and nonmonetary incentives can be tricky. As a consumer, you do it all the time when you make decisions.
Marginal Analysis
Consumers try to boost their utility by making decisions that maximize satisfaction, or benefits, while minimizing costs. You have seen that cost-benefit analysis and paying attention to opportunity costs help consumers figure out what decision will be best.
Consumers also use marginal analysis when they make decisions. Marginal analysis helps answer an important question: What happens if the situation changes by one unit of something? Economic players ask themselves this question in one way or another all the time.
Consider this situation: The latest summer blockbuster has gotten some pretty bad reviews but seeing it will give you a chance to do something with your friends. Besides, tickets for a matinee are only $5. The utility you will receive from that purchase seems high.
But what if you get to the theater and discover that the ticket prices have been raised by $1? It might still seem worth it to go. But it is also possible that the extra dollar pushes the cost higher than the benefit. If that is true, then your utility has decreased, and you likely will choose not to go.
Will you see the movie for $6? How about $7? What about $8? At a certain point, the price will rise high enough that the cost outweighs the benefit, and your decision would change. That is marginal analysis.
Producers Thinking Like Consumers
Even though they may be unaware of it, consumers use marginal analysis when they make economic decisions. For every good or service, there is a point at which consumers change their minds about making a purchase if the price gets too high. Consumers are not necessarily aware of the fact that it was marginal analysis that led to that decision.
Producers, on the other hand, pay close attention to marginal analysis. They hope to maximize profits, which means they want as many customers as possible to pay the highest price possible. To achieve this, they try to predict consumer behavior. Producers ask themselves questions such as, «Will raising ticket prices by $1 drive away moviegoers, or will most consumers be willing to pay that much more?»
Producers use marginal analysis all the time. When producers can increase the utility of consumers, they sell more goods and services. When they can get the most out of consumers, they will maximize profits.
Producers study consumers to see how they make decisions.
More Than Price
Marginal analysis can be applied to other questions as well. Any time one more unit of something can be added, the question of whether it is beneficial to do this must be asked and answered.
A bank manager looks a bit worried. Her customers seem to be waiting a bit too long before they are served by a teller. What if she hired one more teller? The waiting time would decrease, and her customers would be more satisfied. If the customers do not have to wait very long, it is highly possible they will return to the same branch.
A hungry customer has already eaten three plates of sushi. He is considering ordering one more plate and uses marginal analysis to compare the pros and cons of doing so. He knows that he might not enjoy the fourth plate of sushi as much as he enjoyed the first three. And he does not want to get sick from overeating. In the end, his marginal analysis tells him to forgo that fourth plate.
David is a city council member. The council needs to vote on a one cent increase to a local tax. David and another city council member want to vote in favor of the tax increase. The extra money will allow the city to replace a worn-out playground at a neighborhood park, which would be beneficial to local residents with children. A third council member is against the tax increase, because not all residents will benefit from the new park, and she thinks the money could be spent in a better way. Marginal analysis is different from person to person because everyone has individual goals and values.
Everyone is unique. It is what makes people separate individuals, each with their own likes and dislikes. In the game of economics, this uniqueness means that consumers have different tastes and different preferences when it comes to buying goods and services. Look at all the brands and types of cereals in a grocery store. That should give you some idea of how diverse consumers’ tastes are.
Consumer decisions are influenced by many factors. Taste is just one of them. See the list below for some of the nonmonetary factors that influence consumers.
– Taste
– Culture
– Beliefs
– Values
Beyond Money
Culture, family traditions, and personal values all affect consumer decisions. These factors are nonmonetary incentives.
When a family celebrates Thanksgiving, they make economic decisions that might be influenced by the desire to cook the perfect meal. So, they might ignore other factors, like price, because they gain more utility from the feast itself than from cutting costs. The nonmonetary incentive of hosting a great Thanksgiving meal outweighs monetary incentives – at least to a point.
The combination of cultures, beliefs, and values leads to different kinds of decisions being made by different consumers, even when they face the same situation.
Working together as a family offers incentives that go beyond money.
Culture Matters
The desire for particular goods and services is often influenced by a person’s culture.
Part of the culture of the United States is Independence Day, or the Fourth of July. Thanksgiving is also important in the United States. Because of these features of the culture, consumers buy a lot of fireworks in early July and a lot of turkeys in late November.
How Culture Influences Consumerism
As we learned before, our economic decisions are based on what culture or cultures we belong to. Culture is more than just holidays and sports, though. For instance, the rock-and-roll culture is highly present in many countries around the world. People who belong to this culture enjoy dressing like rockers, buying and listening to rock music, attending concerts given by their favorite bands, and collecting memorabilia.
Traditional Native American cultures consider humans an integral part of the environment, not a dominating force. They are closely tied to natural resources and events, and they value and