The Concepts I Learnt From Cocktail Party Economics
From reading Cocktail Party Economics, there are a lot of concepts which I had found interesting, shocking, and even obvious.
The idea in the first few chapters is to just give an introduction about the vocabulary of an economist. This is where I learnt that scarcity is costly. By this I mean that you must give up something in order to get something else. For example, giving something up may not always mean money, but also your time or the effort that you put in, in order to acquire this certain thing. Economists call this your opportunity cost. If you are choosing between two things, say studying for a test or hanging out with your friends, the opportunity cost of hanging out with your friends is the time you’re giving up that you could be studying for your next test. Whichever choice you would have made would have cost you the other option. Scarcity and what people are willing to pay is different for many people. In the same example, you might have chosen to hang out with your friends instead of studying, but someone else may have chosen to study, and given up the time with their friends. This does not mean that either decision was right or wrong, but rather that you valued to hang out with your friends more than your next grade, while the other person thought that hanging out with friends would be too costly so they chose to spend that time studying. The example that opened my eyes most about the value of scarcity was the example of how much parents value their kids. Not to say that some parents value one kid over the other, or that some parents value their kids more or less than another parent. But that some parents have to go through more to have a child than others. Those that have children would not be able to put a value on how much they love and adore them but they may not have gone through much to have their child. We all are told that pregnancy is not the easiest thing, but they can conceive a child without thinking that some people do not have the ability to do this, and have to go through adoption. The wait to adopt can be a long and difficult process. The hidden values about what parents are willing to do to have a child are revealed. Babies can be scarce to those that cannot conceive the normal way, and the cost is higher. In this case, the cost in Canada is the time one is willing to put into waiting for all the doctor’s appointment, or in some cases, the pain they might go through during medical procedures.
I found this very interesting because I know most people that have children do not think about how easy it was to conceive and have a child. One of my cousins, for example, had lost her child the week before his due date and none of the doctors had any explanation for his passing. Another cousin of mine had gotten pregnant before her wedding unexpectedly. Not to say that one of my cousins loved their child more, but they did not realize what each other had gone through. The cost of my one cousin’s loss was the pain she had gone through, emotionally and physically. My other cousin’s cost was having to move her wedding date to a later time so she could have the baby before she got married. In this case, the cost is much different for the both of them, as there was no choice for one of my cousin’s loss. But for my other cousin, her revealed preference was to have the baby before her wedding day.
Another concept that I learned was how much the quantity demanded is related to the consumer’s personal life. You might be confused as I was at first when reading this, but as it went on to explain, it became easier to understand. The quantity demanded is how much the consumers want to buy. It goes on to explain that there are four main groups that change consumer demand. The first group is the preferences of consumers. Everyone wants to fit in and follow the trends; if you look up to a person or admire a person, you might want to buy the same things that they have. For example, when one of your friends has a pair of ripped jeans that you like, so you decide to get them. Next thing you know, everyone has them and that’s where consumer demand rises. The next group is consumer income. As consumer income fluctuates, so does the amount that they are willing to pay or the amount they are buying. For example, if you get a new job but are starting off at a lower rate than your previous job, you might pick and choose the things you are willing to buy. This would create a decrease in quantity demanded. Instead of buying the most expensive meats for your dinner, you may instead opt for the lower priced meat. Although, there are some things that you are not willing to skip over in the aisles thinking about your smaller paycheck; goods like toothpaste or shampoo and conditioner would be examples of things you would still buy although your paycheck is a little slimmer. The third category is the prices of related products. Take shampoo and conditioner for example. If the price of shampoo goes down, you would want to buy some, while you’re there you’ll probably think to yourself that you might as well buy some conditioner while you are there since you run out of each at generally the same time. We call this a compliment because the products go together.
Another example of compliments would be hot dogs and hot dog buns, or salt and pepper. Prices of substitutes also affect the consumer demand. Substitutes are products that are similar that the consumers would value the same, so the last deciding factor would be the price. An example of a substitute would be Coke and Pepsi, or different brands of the same product. Continuing with the shampoo example, I was recently in the store to buy some shampoo when I noticed one brand on sale. I don’t really have a preference to which shampoo brand is my favourite, so I chose the one on sale. The only thing that would have led someone to choose the more expensive brand would be if it had something better to offer. For example, a different, more expensive brand may say that it will help prevent split ends or make your hair grow faster and fuller. This might push the consumer to pay the extra money to get the special features. The last category is the number of buyers in the market. If there are more people wanting to buy something in the market, the demand will go up as well. For example, holiday’s are a good example of this. On Halloween, there are more people willing to buy a lot of chocolates, so the demand for chocolates increases significantly.
A concept in Cocktail Party Economics that I found pretty surprising was how much of an effect big players in the market have an effect on locally owned businesses. It explains that bigger businesses can get their products from much farther away, from developing countries that can pay their employees much less, therefore making it a lot less expensive for bigger businesses to buy. The locally owned, small businesses do not have the money or opportunity to buy from those countries, so they have to buy their products from places closer to them, which makes it more expensive. Since these small businesses are buying the products for more expensive, they have to sell them for more. No customer is going to see the same product at two places and opt to buy the more expensive one. This makes it much more difficult for these small businesses to continue operating since their costs are so high. A family friend of mine owns a small business up north but they seem to be doing well. I never thought about why they are not struggling, but after reading this chapter, I realize that it is because they don’t have any competition up there. They live in a small town and there are no big businesses, only locally owned businesses.
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