×

The Marginal Utility of Whiskey: A Primer

Glass of Whiskey
Jonnie Miles | Getty Images
Glass of Whiskey

The ideas of marginal utility and economic subjectivism...

Hold on. I was about to say that those things tend to make the eyes of readers glaze over.

But I noticed your eyes are already a-glazing.

So, without further delay, here's my old friend John Zmirak explaining these things without the glaze.

The most important part of understanding how prices work is the idea of “marginal utility.” Before this piece of jargon sends you racing for the “Back” button, let me explain it in terms of bourbon.

Let’s say you’ve given up drinking for Lent, and a friend who’d read "The Bad Catholic’s Guide to Wine, Whiskey and Song" informs you that, in the Western Church, Sundays aren’t part of Lent, and you actually shouldn’t continue your penances then. Every Sunday is, in fact, a little Easter, and deserves to be marked by leisure, prayer, and some festivity. Delighted, you make your way to the nearest tavern. That first glass of Basil Hayden bourbon you bring to your lips will taste like the nectar of the gods. The second will make less of an impression, and if you unwisely kept drinking for several hours, at some point the prospect of one more glass will make your stomach turn. The utility of that first glass of bourbon was much higher to you than the second or the seventh. In theory, you might have been willing to pay $15 for the first shot, but only $5 for the last one.

However, no businessman (mercifully) can read your mind and shift the prices to match exactly what you’re willing to pay each time. Instead, he must set it low enough to match the last drink you’re willing to buy, when your craving for a drink is at its margin, or limit. So the price of any product is set by the marginal utility felt by the consumer—the amount they’re willing to pay for that very last drink. Increase the supply—for instance, by opening up an equally comfy but cheaper bar next door—and that price will fall. All this, because the value of a glass of bourbon is subject to our decisions. That is, it’s subjective.

An old friend of mine, who was an expert in the matters of whiskey and women, said that the rule for last drinks and last dates should be the same: Skip 'em.

Questions? Comments? Email us atNetNet@cnbc.com

Follow John on Twitter @ twitter.com/Carney

Follow NetNet on Twitter @ twitter.com/CNBCnetnet

Facebook us @ www.facebook.com/NetNetCNBC