Have you ever stepped foot in a grocery store and been immediately overwhelmed by all the choices you have about everything from chips to sodas? The paradox of choice is that we often believe having multiple options makes it easier to find the product we really want, but it turns out that having a lot of options makes it harder to figure out exactly which one we want and often leaves us unhappy with our choice.
Troy and Abed are sitting at dinner in a fancy restaurant when the bill arrives at the end. Troy initially offers to pay for dinner because it was Abed’s birthday, but is shocked by the final total since so many things on the menu must have been listed as “market price.”
Restaurants often list menu items as “market price” because they may include item (like lobster or fish) that have a constantly fluctuating price. Instead of printing new menus to account for changing prices, restaurants will just list it at “market price.”
Thanks to Luke Starkey for the clip submission.
In this clip, the main character, played by Ricky Garvais, is taking his nephew out to lunch. They decide to both order the fish sticks meal from the kids’ menu. When Ricky attempts to order this meal, the waitress informs him it is only for children. Although the café is practicing a common form of price discrimination, Ricky’s character is confused and argues he should be able to order the meal and pay a smaller price for a smaller portion. The server argues this is not true, and that the meal is made cheaper for children. The character claims his nephew is hungry and wants to eat two meals… much to the waitress’s chagrin.
This clip is an excellent display of price discrimination, the necessary condition of being able to segment the consumer base (by age- with visual confirmation), and a conversation/confusion around if different prices truly reflect different marginal costs of production.
Thanks to Sheena Murray for the clip submission and summary!
The Roses are trying to buy a last-minute Christmas tree, but they’ve come to realize their options are limited. The shop owner knows demand has recently been higher because there aren’t a lot of trees available in the store. Raymond finds that the prices are higher than he was expecting and decides to leave.
The shop owner takes a few creative approaches to selling trees, including bundling air fresheners with purchase and offering a discount if people buy two trees. Price discrimination is a popular tool to increase output for a firm and sell products to people across the demand curve.
Thanks to James Tierney for the submission:
Alex Keaton talks to pre-schoolers about starting a business and taxes. It is a fun clip to show when introducing a discussion about taxes. To avoid any issues with political differences, I usually note beforehand that Michael J. Fox, who plays Alex, was a Democrat in real life but played a Republican on the show.
Thanks to Matt Rousu for the clip and description!
George has become quite the entrepreneur through arbitrage. First, he buys snow globes from a company going out of business to resell at a higher price than to his neighbors. Now, he realizes that he can buy candy in bulk and then sell it outside the vending machine to people looking for a cheaper option. Even though it’s against school rules, he realizes that the school’s monopoly power over the vending machines results in higher prices than what’s necessary.
George notices that the greeting card store downtown is going out of business and he sees this as a business opportunity! He believes that he can buy Texas-themed snow globes for $1 and resell them to his neighbors for $5. George is arbitraging the snow globes, buying low and selling high. He goes through some struggles at first, but finds out how to sell them by the end of the episode.
Tim tries to host a guys night and things don’t seem to be going his way. Beyond the awkwardness of just the two of them, the big pay per view fight lasts only a couple of seconds. While the two did get to watch the fight, which had a knockout, it wasn’t quite worth the hundred dollars they paid. Tim notes that he may be able to turn it off and get his money back. With a lot of experience goods, it’s not necessarily the actual outcome of the action that people care about. Tim and Matt did see a fight, so why is he so focused on getting his money back?
A second quick econ line occurs later when they sit down for dinner. Even though Tim isn’t eating any tacos, he notes that the cook is cheaper since he expects Matt to eat 25 or 26 tacos. This form of bulk discounting represents second degree price discrimination. With this pricing mechanism, the hope is to induce customers to purchase more than they would have (law of demand) even though making an additional taco doesn’t have the added cost of another cook.
Russ Roberts spins a tale of a local bread market and wonders about the power of such a market. He hypothesizes the trouble that could occur if one person were given supreme power and became a bread czar. You can read the poem online as well, with commentary!
A CIA agent creates a fake Hollywood production in order to fool Iranian terrorists into releasing a group of U.S. diplomats based on the 1979 Tehran hostage crisis. In this scene, Tony (Ben Affleck) presents the concept of Argo. The CIA will eventually grant the proposal, but they want to know if there are any other bad ideas that could be better.
The concept of “the best bad idea” helps explain why some firms may operate in the short-run despite suffering a loss. While firms would love to earn a positive profit, there are a few loss situations available as well:
- (WORST) Firms can produce below AVC and lose both their fixed costs and some of their variable costs
- (BAD) Firms can shut down when prices are below AVC and lose their fixed costs
- (BEST OF THE BAD) Firms can produce as long as prices are above AVC and lose a little bit of money
Some students always want to divert to shutting down if firms face losses, but there’s a “better bad idea” as long as prices are above average variable costs.
Thanks to Darren Grant for the clip suggestion!
Darren also has a new book out entitled Methods of Economic Research!