Cora and I followed the economic lessons from scarcity to elasticity this summer. This week's lesson centers on utility. Utility in the economic sense doesn't mean gas, electricity, or telephones, but it can incorporate those products/services. Investopedia explains utility through chocolate, a dangerous topic for me since I'm on a diet. Instead, I'll take you in another direction to help you and your teens understand this somewhat abstract subject.

If you remember our first economics lesson, then you know that nations and individuals operate on scarcity. This means that you and I and make decisions based on limited resources, even if you or I won the lottery. Since resources are limited, many individuals will seek to fulfill needs before wants. If you want to save for the future, for instance, you know that you need shelter first. But, you might choose to live in a tent rather than in a mansion so that you can invest more money into your portfolio.

Underlying this issue of supply and demand, or wants and needs vs. what's available to fulfill those desires, is the concept of utility. Total utility is the complete satisfaction of your consumption based on portions of consumptive products and/or services, or marginal utility.

Say that you wandered through the Saharan Desert for a week, and you reach a pond filled with drinkable water. The water that you drink represents portions of marginal utility that will quench your thirst, or total utility, and your desire for that marginal utility will decrease after the first glass. Granted, you'd probably give up anything for that first glass, but you'll desire less water after the second glass, and by the time you drink that third glass, you might wish that you were thirsty again. At that point you've reached total utility until you desire or need that water again.

In the realm of economic utility theory, the less you own of any given consumptive product or service the more satisfaction you gain from your initial purchase. Therefore, you also will display a higher willingness to pay more for that product or service for the first go-round. The more that you consume of that product or service, however, the less that you value that given commodity. This is why we suffer through commercials, because companies want you to try their product. Once you've tried it and liked it, those same companies know that you need to be reminded how much you enjoyed it the first time.

Another example: Your goal is to save for the future, and you'll do anything to make that first step. You decide to purchase $1,000 worth of XYZ's stock at $10 per share, because you believe this is all that you can purchase on your budget. Your first purchase might feel risky yet satisfying, because you've made the first step toward your goal on what you believe is your last dollar. The following week you might remain anxious about your purchase, but you will begin to lose the fear that you experienced the previous week. You really didn't suffer all that much, did you? You might begin to experience a "ho-hum" feeling with each stock purchase as you come closer to your goal, because you will devalue your risk in that investment - but only if that investment returned a profit.

Economists expect consumers to be rational, which says a lot for people who invest. Why do I say that? Because economists believe that people will purchase a number of items for the same amount that it would cost to pay for one item. Many investors, according to the stories that I've read over the past five years, don't diversify despite the fact that they can purchase several investments for the same amount of money (like BUYandHOLD's E-ZVest^sm program, for example). Therefore - according to economic theory - investors who don't diversity aren't rational.

Back to that pond in the desert: You arrive at that pond and you discover potable water and chocolate for $10. You might go for the water first, but you might also go for the chocolate after that first glass of water based on the rationale that the chocolate would provide you with needed energy (and, because your desire for water literally has been quenched). In reality, the water/chocolate combo would do more for you than just water alone. Unfortunately, you would devalue both commodities if you knew that you that you could have your fill of water and chocolate for free just over the hill.

If that over-the-hill water and chocolate cost money, however, you'd just laugh and stay right where you are, especially if you have an unlimited supply at the price that you like. If, however, your supply runs out or if it doesn't satisfy you, you'll make your way over that hill and you'll pay the price that they ask if you want or need what they have.

Back to the stock market: You met your XYZ goal (a $1,000 investment), but you didn't make a profit - in fact, you might have lost money on the venture. You haven't reached your total utility, because that stock's lack of profit hasn't satisfied you. At that point, you may realize that you could have gained more benefits if you'd invested in a number of stocks rather than in just one for the same price. Not only would you gain from the balance provided by a diverse portfolio, you would increase the size of your total utility. You have access to an open market, so what's stopping you? You could have your stocks and your chocolate, too.

I don't know how I managed to work chocolate back into these total utility explanations. I think it's because I haven't had any sweet, yummy, gooey goodness for over two weeks?and?I'd be willing to pay?

Until Next Week,
Linda Goin