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.