Economics in Real Life – Marginal Utility of Money Apr19


Related Posts

Share This

Economics in Real Life – Marginal Utility of Money

Economics is a powerful subject. It has fascinated students for decades now. Yet the real beauty of economics is visible when we apply its concepts to our daily life. Among the applications of economics, today I refer specially to the marginal utility of money. Theoretically the marginal utility of money is defined as the change in total utility of a person with a change in one unit of money. Essentially it means, ‘How has your life changed by having or not having Rs 100 in hand’. Any economy attains its maximum efficiency, or equilibrium when the marginal utility of money for each individual is the same. This basically means that having or not having Rs 100 will have the same effect for each person. In the present context, having or not having Rs 100 will make no difference to Mukesh Ambani (the Indian poster boy for excess) but might well mean the difference between life and death to a starving beggar in New Delhi. Therefore if the marginal utility of money for Mr. Ambani is 0.001, for the poor beggar, its 10,000. Marginal utility of money is another way to look at inequality.

Thus today I would like to look at marginal utility of money from a social and practical angle. There are multiple ways in which all of us, as a society can help reduce this disparity. As I travel to and from Delhi University every morning and afternoon, I observe life around me and think about the ways in which I can bring joy by utilising this basic principle. As an example, take the case of cycle rickshaws at Delhi University. The number of cycles and the fierce competition between cycle rickshaws allows the market to resemble a case of perfect competition. There is infinite supply at a fixed price while the spot where the student demand curve intersects the price line, determines the quantity actually supplied. Basically at the fixed prices, a student can get infinite supply. However, at an individual level, each rickshawallah can maximise his sales only by going below the price line (thus, this isn’t complete perfect competition in which suppliers can sell an infinite quantity at the price line). Shrewd students sense this loophole, (through months of practice) and playing on the competition strike the best bargain. Rickshawallas have a simple option, to accept the reduced price or to wait with uncertainty for the next customer, which, in the context of the competition may take anywhere between ten minutes to hours. Generally, depending on the time of the day, they accept (afternoons are slow, and hence ideal for bargaining). This is interesting because a reader may argue that if we are talking about efficiency in the economy then the students are helping to achieve the real equilibrium by taking advantage of a supply demand mis-match with supply exceeding demand at the price line. However my argument is that economically and morally, the actions of these bargain seekin g students are flawed. Let us examine the figures. If a student drags the price of a ride from the metro station to his college from Rs 20 to Rs 15, then the student is gaining Rs 5. What is the marginal utility of these 5 rupees? A part payment towards a can of Coke, or a chocolate, or loose change lost in the jeans pocket, or a part payment towards a packet of chips. The student will not notice, in his daily life, the presence or absence of  those Rs 5 everyday. Thus we can safely say, his marginal utility of Rs 5, is little. However, now lets turn our attention to the rickshawallah. Those 5 rupees mean more to him. On a cumulative daily basis, in a month those 5 rupees add up to Rs 150 which could allow him to get another uniform stitched for his school going daughter, or allow him to buy stationery and books for her, or supplement the daily family meal by allowing the wife to buy spices previously out of range, or on a non-cumulative basis, it simply allows him to have his essential 4 pm cup of tea. And this is merely a single transaction. Over the course of a day, if the rickshawallah loses Rs 30 to enterprising students, it reduces his monthly income by Rs 900 and his yearly income by Rs 10,800. And for what? So that a few students feel a few more coins jangling in their pockets everyday? My point: On a micro level-stop bargaining with rickshawallahs, the money means exponentially more to them than you. On a macro level: We as a society need to be more charitable, on a day-to-day basis. I am not talking hardcore philanthropy here nor am I beseeching the reader to sign mighty cheques. The next time we spot a beggar that looks genuinely in need, we should stop looking for excuses and give him/her money. Sometimes I almost hate rags-to-riches tales because I believe they convince us as a society to believe that if every beggar worked hard enough, they wouldn’t need to beg. And yet having been fed on a staple of success, moral support and a safety net in the form of parents, we simply fail to appreciate the loss of hope and morale that afflicts many and pulls them down to level where they must ask their fellow men for money. We forget that every beggar simply does not have the skills, luck or hope to pull himself up even if a few success stories try to convince us otherwise. Movies such as Slumdog Millionaire further dampen the lot of beggars by bringing into focus organised begging syndicates. Begging syndicates are a convenient escape route in our mind. We refuse most beggars with the thought “the money is anyway not going to them, someone is employing them”. While this may be true of small children working at traffic signals, society as a whole refuses to acknowledge that beggars are the orphans of society and civilisation and it is our moral duty to uplift them.

And yet this thought is not about the upliftment of the millions that constitute India’s poor. Analysts and  policy makers infinitely more qualified than me have written on that topic. I simply want to say, next time you have an opportunity to transfer a small section of your wealth to someone who needs it more than you, don’t hesitate. The true application of the marginal utility of money is when bring a smile to an old man’s weathered face by dropping a Rs 100 note in his begging bowl. So what if I don’t have Pepsi for a week?