The Latent Demand for Pizza

Some time last quarter I happened to see an economic supply and demand diagram on the whiteboard on the third floor. I regret not taking a picture of it but it basically outlined that there was a shortage of free pizza in our hall and that our Resident Assistant (RA) was going to make up for it since he does play the governmental role on our floor. The diagram was actually wrong in the sense that it actually showed a successful market, but what was the essence of that flawed diagram is what I will outline below.

If you haven’t taken any economics, here is an intro to basic supply and demand:

Below is a diagram for the market for pizza on a given school night. Local eateries on the Stanford campus such as the Axe and Palm and Late Night at Stern will sell pizza to you, or rather will supply pizza to the market. The higher the price of pizza, the more they would prefer to sell given that they can make a greater profit. Hell, if the price of a slice of pizza rises I’d even begin making some and selling it to other students. This phenomenon is embodied on the upward sloping supply curve: higher prices => suppliers would like to sell more pizza

Then there is the demand side, how much pizza we students (in this case the students on the east side of campus) demand at a given price. Demand works in the opposite direction. Higher prices means that fewer students will purchase pizza (I wouldn’t pay $20 for a slice of pizza, but I would buy two slices if it was $2). Hence the downward sloping supply curve.

But have you considered the demand for free pizza? How many slices of pizza would you consume if it cost you absolutely nothing? Yes, you may fantasize about dominoes delivering as many boxes to your door. Would you ask for 5 boxes? 10? Infinity?

I am pretty sure that this amount is finite if we impose the constraints that you have one hour to eat all this free pizza. Even if you can consume 20 boxes in one hour, I’m pretty sure that your demand for pizza is less than that. If you’re a girl looking to carve out a beach body for the summer, you probably would eat no more that 2-4 slices of pizza if it was free. If it was me, I’d eat no more than 6 slices in an hour. Why is that? Well after the 6th slice I’d just feel so grossed out from eating pizza I’d just stop eating. Economists would describe this as me experiencing a negative marginal utility for consuming the 7th slice of pizza. (Btdubz, utility is an economists way of saying happiness or satisfaction from consumption).

So my demand for pizza when it costs nothing is free food. This is my latent demand for pizza. And if we sum up the number of slices everyone on this side of campus desires when pizza costs nothing, then we can find the total latent demand for pizza:

Does this scenario remind you of anything? Maybe the comparison isn’t as clear, but think of all the events that occur on campus that advertise free food. Why exactly do they advertise the free food component of their event? To tap into this latent demand and to get a higher turnout at their events.

Does it work all the time? Not really, what ends up happening is that even if they have 1000 slices of pizza, not 1000 people (assuming each person eats 1 slice) will turn up. Why is this? I posit that this pizza is not completely free.

There is an opportunity cost to spending an hour at some event about ‘education’ or ‘identity in the west’ (assumption: I derive no marginal benefit from this event); I could be spending my valuable time doing homework or watching Grey’s Anatomy instead! There is also a slight transportation cost, and this is more of a discomfort cost, I’m less likely to haul myself all the way to west campus at 9PM unless someone is flying me there in a helicopter. So in essence, this market of “free” pizza does clear, the people who attend these events are those that feel the marginal benefit to them of the free pizza is greater than or equal to the cost of attending the event. There really is no such thing as a free lunch (or snacktime!).

Additionally:

This also means that when there is a cost for pizza, the demand curve may no longer be a straight vertical line (perfectly inelastic). If its something like a transportation cost then there is only a fixed cost and the curve should still stay vertical but shift in instead. However, if there is a variable cost (like opportunity cost for each minute it takes you to consume a slice of pizza), then the curve will shift downwards and the curve will no longer be vertical, it will be like a regular demand curve.

So if you are an event organizer, how do you draw in more people? Here are some of my recommendations based on sound economic principles:

  1. More effective marketing. This one is intuitive, the more people that know about your event, the higher your attendance.
  2. Have an event that has a gives attendees a higher marginal benefit. If President Obama is going to be speaking, I’m going to be fighting with my best friends for the last ticket, if its some no-body from Wisconsin, then your pizza better be good.
  3. Reduce the opportunity cost of attending the event. Sometimes shorter events are better, no need for a day long conference when it doesn’t need to be.
  4. Reduce the transportation cost of the event. Think ‘central locations’.
  5. Have better food. The real and latent demand for Chipotle or In n Out is much greater than it is for stale fries.
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About alalani
I grew up in Tanzania and now I'm a student at Stanford!

3 Responses to The Latent Demand for Pizza

  1. RU says:

    Interesting AK! Just wondering, why is the latent demand curve perfectly inelastic “btdubz”? 🙂 Also, if it has diminishing marginal utility and an associated marginal cost (time, weight gain etc), does the latent demand actually just become a regular downward sloping demand curve in practice? Just some free food for thought.

  2. alalani says:

    When we associate a cost to pizza, the demand is no more latent since each consumer has to “pay” with their time and effort to consume a slice. But if pizza had absolutely no cost, for example if dominoes delivered free pizza straight to your mouth, then the number of slices you demanded would be fixed – hence the perfectly inelastic latent demand curve.
    AK

  3. tahira says:

    Delicious.

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