Archive for the Economics Category

View Economies of Scale with Caution

Posted in Economics with tags , , , , , , on April 26, 2010 by jrvitalis

Are kids really are cheaper by the dozen?  According to economic theory, the answer just might be yes. You may be familiar with the term Economies of Scale, which can be defined as a decrease in cost per unit when production volume increases. For example, imagine you are a business with high research and development (R&D) costs. Assume your R&D costs (i.e. a building, equipment, staff, etc.) are $10,000 dollars and you produce 10,000 units. Your R&D cost per unit is $1.00.  However, if you increase production to 20,000 units and your R&D costs remain constant, your R&D cost per unit decreases to only .50.

Does this principle really work with kids, too?  Let’s look at an example.

Imagine you have two children and currently pay your babysitter $10/hour. But baby number three has just arrived. Even if you have to give the babysitter a slight raise, say to $12/hour, your cost per unit (or cost per kid) has declined, going from $5/kid/hour to $4/kid/hour.

Congratulations, you’ve achieved Economies of Scale!

OK, you’re right – there’s more to the story. While it’s true that in some instances you may achieve Economies of Scale by growing your family, it’s important not to overlook the obvious fact that while your cost-per-kid may decrease on certain items, your overall costs are going to increase.

In other words, you might save money on a per ounce  basis buying a truck-load of Fruit Loops rather than a little box, but the amount of Fruit Loops that extra kid or two will eat will almost certainly dwarf any cost savings you obtain from buying in bulk.

One final note – keep in mind that while buying in bulk often leads to lower per unit costs, retailers are extremely savvy. They know you assume you are getting a better deal for buying the larger package, and occasionally you will find that they actually increase the price for the item in bulk. Always remember to check the price-per-unit, rather than the total sale price, when making your purchasing decisions.

The Law of Diminishing Returns

Posted in Economics with tags , , on April 19, 2010 by jrvitalis

Remember mealtime before you had kids? On any given Saturday evening, you might have spent hours preparing an Armenian Apricot Soup, followed by a balsamic and pepper glazed chicken served with asparagus topped with crumbled feta. After leisurely consuming this palate-please combination, you might have lingered at the dinner-table for hours, sipping wine and engaging in intellectual conversations with your spouse as classical music played quietly in the background.

And then you had kids.

Suddenly, a peanut butter and jelly sandwich, consumed while darting around the kitchen (Mom, I need more milk!) is considered fine-dining. Rather than discussing politics, philosophy, or current events, you dinner conversations now go something like this:

“I’m not eating that!” (Your child)

“Yes, you are!” (You)

“No, I’m not.” (Your child)

“Yes, you are!” (You)

“But it’s green – I don’t eat anything green.” (Your child)

This conversation, in all its variations, could continue interminably. Along the way, you might resort to any (or all) of the following tactics:

Pleading – “Try the peas. Just try them. For Mommy.”

Negotiating – “Three more bites, and then you can be finished.”

If you are especially tired or your little one is particularly defiant, you might even find yourself resorting to ultimatums:

“You’re not leaving this table until you eat your peas.”

If this sounds familiar, it might be time for you to take a look at the Law of Diminishing Returns. According to this economic principle, there is a point at which inputs (the level of effort you put into trying to convince your child to eat) exceeds outputs (the amount of food your child actually consumes). In other words, pick your battles. Is it really worth spending ten, twenty, or thirty minutes trying to get your little one to consume something he or she is hell-bent on not consuming?

But, you might argue, my little one has to eat! True, but if we keep in mind the Law of Diminishing Returns, we might be able to identify scenarios in which the level of effort we put forth (in terms of meal preparation/presentation) results in an equal (or greater) level of output (the amount of healthy foods your child consumes). For example, with a little practice, you can master the fine art of hiding healthy foods in your child’s meals! Making spaghetti? Grate in some carrots or toss in some shredded spinach – your little one won’t even notice. (There are a ton of great cookbooks on the market about “hiding” healthy foods in everyday meals.)

One more tip – remember that framing can be half the battle. At our house, for example, my children love “banana treat.” What, you might be wondering, is banana treat? I mash and mix a (ripe) avocado with a banana (or two). The textures are the same, and the sweet taste of the banana masks the taste of the avocado. Obviously if I had presented this to Puppy and Kitten as “avocado mashed with banana”, they would have refused to even try it. So I’ve always referred to it as “banana-treat,” and they’ve grown up thinking it is a real treat. (I know, they are really going to hate me someday!). Another idea? Slice a banana length-wise, smear it with peanut-butter, and call it a banana boat. Arm your little one with a bowl of raisins, and let them add “people” to the boat before eating it.

Do you have any tips about getting your child to eat healthy foods without a battle? We’d all love to hear them!

Ignore Sunk Costs!

Posted in Economics with tags , , , , on January 15, 2010 by jrvitalis

According to economic theory, sunk costs are defined as any costs you’ve already incurred. In other words, the cash is gone, so forget about it. Sounds simple, right? Well, it is, but the story doesn’t end there. Despite the fact that economic theory demands that we dismiss sunk costs when evaluating future decisions, it turns out that many people fail to do so! That’s right. Even when we know we’re making an irrational decision, we do it anyway.

Let me give you an example. When WALL-E was released in movie theaters back in 2008, I set up a mother-daughter date to take Puppy. She loves going to the movies but because of her age and the lack of age-appropriate content on the market, we don’t go all that often. Needless to say, movie dates are a big deal at our house.

Puppy bounced in the car all the way to the movie theater. We loaded up on the requisite candy, popcorn and slushies, and claimed our seats. The movie started and everything was fine until about halfway through the movie when the popcorn supply ran out.

Suddenly, in the middle of the quiet theater, Puppy turned to me and proclaimed (in a voice I’m pretty sure was loud enough to be heard around the world), “This is BORING!”

Now, I’m sure there are many of you out there who are ready to launch a vigorous debate as to the merits of WALL-E, and I understand that it has its share of admirers, but the bottom line was that my daughter wasn’t one of them. Let’s just say her taste in movies runs more along the lines of the Princess and the Frog, and WALL-E just wasn’t cutting it for her.

I happened to agree.

Obviously there was no reason for both of us to sit all the way through a movie we weren’t enjoying. But did we get up and leave? No.

Why? Because I had paid sixteen dollars for those movie tickets, and I was determined to get my money’s worth, darn it!

If I had been acting rationally, I would have realized the sixteen dollars was a sunk cost – I had spent the money whether we stayed for the movie or not – and left the theater sixteen dollars poorer but a whole lot happier, able to sleep that night knowing that my behavior was perfectly aligned with rational economic principles.

Can you think of any situations in which you (and your children) would have been better off if you had ignored your sunk costs in making a decision? Please post your stories in the comments below!

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