Just as David became a fan of home cooking and baking, he also realised that food and taste buds can help illustrate economic theory. One day instead of showing his usual slides, he came to class with a box of homemade cupcakes.
First he took out some vanilla cupcakes and asked his students to price them.
How much would you be willing to pay for a vanilla cupcake? Does £2 sound about right? Let’s see. I found a cupcake menu of The Hummingbird Bakery online. Their vanilla cupcake costs £2. David students agreed and offered to pay just that.
It makes sense: vanilla is kind of plain, isn’t it? It has an inoffensive flavour, if you see what I mean.
David then plotted a demand curve for his vanilla cupcakes. A demand curve is just a graphical illustration of a relationship between quantity and price. In this example, the demand curve is flat because everyone offered to pay £2 for a vanilla cupcake (except for one student who was on a diet).
If your product or a service is a bit like vanilla, it is hard to imagine charging a premium for it. For example, I'd expect to pay about £1.90 for a black americano in London. This means that if a coffee shop I used to go to in Soho changed its coffee price from £1.90 to £2.50 overnight, they won’t see me again. They might think their coffee is special but there are plenty of good coffee places within walking distance from them.
By contrast, if you are offering something quite different, then you should be able to charge premium. I’d expect to pay about £7 for a paperback, but I’ve happily paid £15 for a hardback of Walking Home, signed by Clare Balding. If you are not a fan of hers, you won’t buy her book, even if it was half the price. I pay £5.99 for 500ml of Booja Booja chocolate ice cream because it is dairy and refined sugar free and tickles my taste buds, but you may rather go for cheaper brand like Carte D'or. The ‘kinkiness’ of the demand curve for ‘chocolate chili' is an important point to remember: some will rave about it, some will hate it.
The classic example of absolute polarity is Marmite. A demand curve for Marmite would look like this.
When you buy chilli hummus in a supermarket, the trouble is that often a supermarket is trying to please everyone and is not making chili flavour distinct enough. The resulting product is bland. The trick is to remember that people who love chili will pay premium for it and they want to taste chili. People who don’t like chili would opt for a plain variety anyway. If you put moderate amount of chili, you’ll please no one as the diagram below illustrates.