The Economics Of : All You Can Eat Buffets
Buffets work on the principle of the law of diminishing marginal utility which states that for every unit of a good consumed the consumer will gain less utility (satisfaction) from the next unit. This means that as more of a good is consumed the less that consumers will be willing to pay for additional units. Buffets make profit by charging a price which is above the price of the food that the average consumer consumes based on the assumption that the customer will be at point of zero marginal utility before they have consumed a quantity of food where the total cost to the firm is greater than the price of the buffet. A fundamental mistake which the over eater group makes when at a buffet is that they fail to realise that the price of a buffet is effectively a sunk cost and therefore all they are doing is lowering their active fixed cost per unit of utility. A lot of buffets are savvy enough to charge a price that they know consumers will never reach in terms of the cost of food. As soon as a consumers utility for another unit of food reaches 0 they will stop eating and thus the price they would pay for more food would be 0. As an example of this process let's say that a random buffet customer consumes 3 plates of food. For the first plate of food they are reasonably hungry and so, if they were to be buying the plate of food seperately, would be willing to pay £3 for it. Moving on to the next plate of food, the consumer is likely to be less hungry and so is only willing to pay £2 for this plate even though the same food as the first could be present. The next plate is likely to be of less value to the consumer than the last until the value of the next plate is below £0. Buffets will charge a price around the value of the three plates to the consumer. This is generally well above the cost of the food to the firm and so reasonable profits can be made. Consumers perceive that for their money they are getting an infinite supply of food and so are willing to pay a larger price than they would at an ala carte restaurant. The buffet supplier knows that the consumer will not be able to eat more than they would at an ala carte and therefore is laughing all the way to the bank.