Economics is the study of how humans decide to use scarce resources, either as individuals or as groups. Once you know some of the basic concepts, you should be able to see how these play out in your daily life.
At least that is how I challenge my students in microeconomics, which focuses on individuals, households and companies. That means I ought to be able to do it myself.
To show it is possible, here are some illustrations of economics from my life on July 19:
I had harvested rhubarb to make several cakes for a group. Having much left over, I decided to can rhubarb sauce, a treat for any former farm kid. But I decided if I was going to make that effort, I needed even more rhubarb.
That is because there are “fixed costs” in home canning. You have to dig out big pots and boilers, get mason jars and bags of lids and rings from the basement. You have to clean up afterward. All this applies whether you do six jars or 30.
Divide these costs by the number of jars and you get a high “average fixed cost” if you do only six, but only one-fifth as much per jar if you do 30. Since the “variable costs” of canning rhubarb — time spent dicing, money paid for sugar and jar lids — are directly proportional to jars filled, doing more jars in one session lowers the “average total cost” per jar.
A layperson might say this is an example of “economies of scale” in canning. People would know what they meant, but that is not quite right.
Technically, economies of scale apply only when one moves from one size factory or set of equipment to another. That would be using a large pressure cooker holding seven quarts versus a small one that only does three pints. So while my doing a larger batch resulted in lower “unit costs,” it was stemmed from moving to a lower point on the “average total cost curve,” not economies of scale.
Our patch being picked out, I went to the Farmers’ Market at its Friday location in West St. Paul. This is much smaller than the weekend market downtown, but my focus was narrow, or at least I thought it was. Shopping can be a “production activity,” getting something necessary done, but it can also be a “consumption activity,” one that is pleasurable in itself and thus produces “utility” or human satisfaction. If working for pay produces satisfaction beyond that afforded by the money earned, it is said to produce “psychic income.”
By going to the smaller weekday market, I sacrificed some of the psychic income I might have gotten from participating in the Saturday morning throng downtown, but I increased “labor efficiency” by choosing an option that allowed quick purchases.
I arrived at 11:40, 20 minutes before closing, so vendors were willing to engage in “first-degree price discrimination” by haggling with a volume buyer like me. Price discrimination involves charging different prices to different buyers with differing “elasticities of demand.” “First degree” refers to a situation like a bazaar, where the seller attempts to find the absolute willingness to pay of each individual customer, rather than “third-degree” discrimination, which is simply dividing buyers into two groups, such as tourists willing to stay over a Saturday night and business travelers who might not be.
Vegetable sellers realize that already-harvested produce represents a “sunk cost” that they should ignore. The question for them is whether to take a certain offer from me today or wait for a possible sale the next day.
The more “uncertainty” there is about tomorrow or the more perishable the product, the more they should accept a low offer. But if I am too stingy, I may have made my trip in vain. To really analyze the situation one needs to use “game theory.”
I am a sucker for impulse buying. As I was counting out $10 for eight bunches of rhubarb, listed at $2 per bunch, my eyes fell on some succulent purslane. I love this leaf vegetable but had never encountered it commercially. The price was only $1 per bunch. I bought all four, without bargaining.
It turned out the two bunches on top of the pile had much finer stalks than the two underneath. This was an example of “asymmetric information” in which one of the parties to a transaction has more relevant information than the other. George Akerlof, husband of Janet Yellen, Ben Bernanke’s Fed colleague and putative replacement, got the Nobel Prize for exploring this.
If I had examined the goods, I might have noted the quality differential, but “transaction costs,” and, in this specific case “search costs,” are not negligible. Spending time discussing the quality of the product might have kept me from finding still more rhubarb that I wanted.
Vendors were taking down their tents and tables. Returning home without all the rhubarb I wanted would have been an “opportunity cost,” of cheaper or better purslane.
Opportunity cost, the value of what is necessarily forgone when you choose to do any single thing, is the foundation of everything else in economics.
Besides, I would have paid $5 a bunch for the purslane. The fact that I was getting it for $1 created a lot of “consumer surplus” for me.
Finding that some of my trove was a bit more rank than I first thought merely left me a bit less well off than I had thought, but still much happier than if I had not encountered the delicacy at all. And the woman who had sold it clearly seemed pleased with the $4, so we had engaged in “mutually beneficial exchange.” Both of us had greater utility than we had 15 minutes earlier.
Some farm kids and devotees of Euell Gibbons know what purslane or portulaca oleracea is.
However, many Minnesotans don’t, even though it is eaten by many millions of people from northwest Europe and North Africa across the Mideast, the Asian subcontinent and in Australia and sells for $20 a plate in some trendy Manhattan restaurants.
Purslane is interesting in that, because of its late germination, it does not emerge in time to be killed by farmers’ spraying glyphosate herbicide on their corn or soybeans. So the wild plants are thriving. I no longer have to scout parking lots behind liquor stores on University Avenue to get my annual stash. All I need to do is comb the southern edges of corn fields back home. But the opportunity cost of my time is such that it is even better to buy it for $1 per large bunch.
Nevertheless, The increased availability of it has been a “spillover benefit” or “positive externality” of use of this herbicide.
It also is an example of technology as a “supply shifter” in that the herbicide makes more of the good available at any given price, in this case even if free.
I could go on, but those are a few dozen examples of economic ideas manifest in one hour of my life. See what you can come up with in yours.