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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2$\begingroup$ opportunity cost, violations of free disposal $\endgroup$– PburgCommented Dec 5, 2014 at 18:20
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$\begingroup$ @Pburg, the other answers are correct, your answer is the best. $\endgroup$– JamzyCommented Jun 4, 2015 at 5:21
3 Answers
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.
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.
Because nothing is really free. Even if the seller is not charging money for the product, you have to go to some time and effort to get it. Once you get it, it will take up space in your home. It may require maintenance. If someone is giving things away for free at a table, you may have to listen to their speech about whatever to get the free item, and you'd rather not. Etc.
Recently my daughter and I saw an advertisement for some new product that talked about how it would change our lives and all, the usual advertising hype, and I commented that it seemed pretty useless to me. Then I said, "I wouldn't walk across a room to pick one up if they were giving them away for free." Surely you can imagine products that you would consider similarly worthless to you. Food that you don't like, clothes that don't fit your style, etc.
In some cases the value I attach to a product is quite literally less than the value I attach to the 5 minutes of my time that it would take to pick one up and carry it home.
And by the way, some people may value a product as having negative value, so even if you offered to deliver it to their door they wouldn't want it. To take a silly case, there was a Monty Python skit about the "Poetry Book of the Month Club" sending free buckets of cow manure to every customer. If someone came to your door offering you a free bucket of cow manure, would you want it? I think for most of us the answer would be no. Less dramatically, if someone offered me a free T-shirt with a slogan advocating some political cause that I totally disagree with, I wouldn't want it. (Well, I suppose I could cynically ask for not just one but enough for my whole family and then throw them away, just to cost these people money. But whatever.)
