Monday, January 16, 2017

Consumer surplus

A while back the Freakonomics podcast brushed upon the subject of Consumer Surplus.  I had never heard of it before, but when I did it was one of those "aha" moments.  Consumer surplus is essentially the amount you would have paid for something, but didn't have to.  The concept is so simple, and it had been on the peripheral of my understanding for years.  Now that I've heard it stated so clearly, it's influenced everything I've purchased since.

For example, in the past I've seen things for $2, and didn't buy it because I could get it for $1 at Walmart.  But the fact is, I'm not at Walmart, and having it now might we worth two dollars, or even $3.  An even better example is Uber.  Paying for a ride seemed so frivolous to me, I rarely did it.  Recently there have been a couple of weeks were I put in twenty additional hours of overtime.  In the past this was rough.  This time I just asked myself, 'Is going from five to seven hours of sleep worth $20?"  It was probably worth $40.  That's not frivolous, that a heck of a deal.  Uber's low prices and great service didn't hurt either.

Another interesting way the concept has affected me is when I've ended up paying too much.  Maybe something had cost me more than I expected it would, or maybe I just hadn't thought it through.  In the past if I had ended up paying for something, lets say $40, and was disappointed, I'd kick myself, and mope over having wasted $40.  Now I ask myself what it was actually worth to me.  I mean, it's never really worth zero.  Maybe I decided it was worth $30.  Okay, I wasted $10.  Not great, but not nearly as bad.

What got me thinking about this is my pending vacation.  Airfare and hotel stay will be under $1,000.  That's a great price to see the world.  And experts will tell you that money spent on experiences are almost always worth more than money spent on things.  You pay once, receive the experience, but also receive the memory of that experience over and over.  It's the ultimate consumer surplus.

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