Why Do Big Packs of Chips only Cost a little more than Small Packs of Chips?
Say you are in the supermarket and you are choosing different sizes of chips to buy. You can get a 40-gram pack of chips for $8 (HKD) or you can get a 80-gram pack of chips for an additional $4 (HKD). Same thing for other products like milk, jam and pretty much anything in the supermarket.
So what’s going on here? Why do they charge much lower for extra chips?
Well, that perfectly illustrates the concept of diminishing marginal utility. Suppose you come to the store and you are craving some scrumptious chips. You will be willing to pay quite a lot for your first serving of chips. But once you have had your first pack, the additional serving won’t be as good as the first one to you. Therefore, that means your demand for the first pack of chips is high but not so high for an additional pack.
The same goes with water. You are thirsty and you are willing to pay more for your first drink. Once you have quenched your thirst, you don’t really need a second bottle of water.
The above examples show how the theory of marginal utility is at play. The supermarket can charge a lot for 500ml bottled water, but they wouldn’t double the price for 1000ml bottled water because they wouldn’t sell many if they did. They would still charge slightly more than 500ml bottled water.
In a nutshell, diminishing marginal utility means that your demand for the first serving of chips is high, but your demand for additional servings is much lower. Lower demand means the supermarket could only charge a lower price.