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The normal supply and demand models take the supply and demand of a particular good and show that the equilibrium price is where the two curves intersect. At this point, all the people below the equilibrium point value the good as worth less than the price; on the other hand, all the people above the equilibrium point value the good as worth more than the price; people at the equilibrium point value the good at the price value.
In my mind, following this logic, everyone should want to "purchase" a free good. But that is not necessarily the case. For example, in an undergraduate program, the university will give away t-shirts, pens, etc. to the students for free. However, not all of the students will want these items. However, since the price is free, it seems that everyone should want them.
How do we reconcile both of these observations?

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opportunity cost, violations of free disposal –  Pburg Dec 5 '14 at 18:20

2 Answers 2

You can imagine a demand curve continuing through the x-axis as monetary price becomes negative. A negative price can be interpreted as payment to pick up shirts, a kind of subsidy.* That might tempt those who are still unwilling at price of zero because there's still a opportunity cost of picking up the shirt, or because they only wear collared shirts, or because disposal is not free (the unwanted shirt would need to recycled).

In the simple model, the demand curve that represents willingness to pay is holding these other factors fixed. In a more complicated model, the price drop might induce congestion at the student union, so the demand curve would also shift down or up, depending on your desire to spend time in a crowd of college students.

*Obviously, you have to impose some sort of limit per student to keep quantity demanded from shooting off to infinity.

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Consider the politically, ideologically, philosophically and emotionally charged question (let's assume that it is free of framework effects):

"If a destitute person asked you for money, would you give some to this person?"

There are various answers around the world that reflect and represent different political, ideological, philosophical and emotional points of view and stances -and there is the answer of Economics:

"It depends on my utility function, and the optimization result under the constraints I face".

Offering something for free, removes effectively the "constraints" part (since more over we implicitly assume that the acquisition and consumption/utilization of said goods does not create any visible transaction costs). But it does not affect the "utility function" part. And the utility function represents preferences, and preferences is a primitive concept (in Economics): they are what they are.

So a simple answer to the question is that "People who don't pick up goods that are offered free of charge to them, have zero utility from consuming them". Why? Because. (The obvious arbitrariness of it at the same time ensures that no value judgements creep into the Theory at this fundamental level).

But surely, a pen has some undeniable functionality for a student: with a pen you can (still) take notes... isn't it somehow unrealistic to say that students may have zero utility from them?

It isn't. And this is because we are not talking about the abstract concept of a "writing device", but for a specific pen, of a specific color, design, touch feeling etc. It is reasonable to say that all students do have some positive preferences for "writing devices", and they do face some budget constraints. So taking a free pen would save them money to buy something else... if the free pen does not have some characteristic that offsets the utility from writing with it. So the pen may create disutility due to its various characteristics, which cancels the utility from using it as a writing device, or even exceeds it.

Add to this the fact that the most usual violation of the axioms and assumptions of Consumer Theory is that, in reality, Indifference curves are "thick" (and not dimensionless lines): small variations in the quantity of a product/service do not really move us to a different Indifference curve. While this is not important for the usefulness of Indifference curves & Co as a base to build models to talk about markets and the economy (aggregation is a formidable smoothing device), when you go down to individual behavior and want to explain it, it does matter. So even if the disutility from the pen does not fully eliminate the utility it may offer as a writing device, still, what is left may be so little, that taking the pen would leave the student on the same Indifference curve.

In possible combination, the other axiom/assumption that is usually violated is local non-satiation: "currently, I have all the pens I need" (mind you that this very natural to the ear phrase just violated Consumer Theory -there is no such thing as "all I need" in Consumer Theory). The student is satiated, and as for his future needs for writing devices, the previous axiom-violation takes care of it, helped by the discounting of the future.

If one would want an explanation assuming that Consumer Theory holds in reality as in theory, then one would have to insert into the picture some costs, which function as an implicit price: go to a specific office to pick up the pen which is not in the itinerary of the student, burning extra calories to carry the extra weight, find space to keep the pen... things like that.

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