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Tuesday, June 20, 2017

What Slurpees Can Teach Us About Economics

And what 7-Eleven had to learn the hard way.

Friday and Saturday were Bring Your Own Cup Days for Slurpees. On these special days, gleeful children and adults flock to their local 7-Elevens with cups of all shapes and sizes to fill up with ice-cold, sweet, slushy goodness.

This year, the limit on cup size is 10 inches in diameter. But in previous years, there were no restrictions on the size of your “cup,” so people brought huge glasses, mailboxes, plastic sleds –

Wait, mailboxes and sleds?

Yes. People have brought mailboxes and sleds to fill up on Slurpee day.

Dear @7eleven,
How’d I do?#BringYourOwnCupDay
I brought a mailbox. #BYOCupDay

— Erik Zachary (@ErikZ) March 19, 2016

Best holiday of the year #BYOCupDay

— mayor tucker adams (@thetuckeradams1) March 18, 2016

Of course, normally, people don’t bring mailboxes and sleds (and buckets and kiddie pools) to 7-Eleven on any other day, or to any other restaurant.

For example, would anyone bring a mailbox to Wendy’s and fill it up with Frosty (a thick, milkshake-like treat)? No!

This is because Frosty costs money depending on how much you buy. Customers will pay a modest price for one spoonful of Frosty, but I have never seen anyone come into Wendy’s to fill a 20-gallon garbage bag with the stuff.

Pay Less, Get More

We can explain this puzzle using the “demand curve.” The demand curve is a relationship that predicts people will want more of something when the price goes down and less of something when the price goes up. Here is Gustav, the mouse from my website, showing that the demand curve on a graph slopes downward.

As the price decreases, the quantity that people will buy increases. If the price of an additional quart of Slurpee goes all the way down to zero, people might “buy” by the bucketful, like at 7-Eleven on Bring Your Own Cup Day.

There’s another important reason why no one brings buckets to fill with Wendy’s Frosty: this is something economists call “decreasing marginal utility.” Think of the vertical “happiness” axis of this next graph as the willingness of a consumer to pay for an item. The willingness to pay is higher for the first item, but gets lower and lower for each additional item. The “marginal,” or additional, value of a 100th spoonful of Frosty gets very low, so it’s not worth the money.

Maybe a cold Frosty isn’t your thing. Have you ever had a fresh, homemade chocolate chip cookie? You can’t eat just one! I can eat three, and then I usually still want to reach for a fourth cookie.

But eventually, as you can see in the graph, you get so full that you wouldn’t pay anything for an additional (or “marginal”) cookie.

No More Sleds

It’s probably because of the Slurpee abuses like those documented above that 7-Eleven now has the 10-inch-diameter rule. When quantity is disconnected from price, we need other rules to decide how much Slurpee is too much.

Reprinted from Learn Liberty.

  • Joy Buchanan is a sixth year PhD student in the Department of Economics at George Mason University. She received her BA in economics from Chapman University. Additionally, she has presented at the Southern Economic Association annual conference and coauthored a book chapter on fiscal discipline with Dr. Vernon Smith.