A year ago I was shopping at Valley Fair and decided to check out what clothes were available at Abercrombie. I had gone into the store hoping to find a pair of good quality jean shorts, and I ended up finding the perfect pair, as well as finding a dress that I liked. When I went to buy the clothes, I wasn’t aware of just how expensive each item was. Upon learning that each item was sixty dollars, I knew I couldn’t buy both. I had a couple of options. Buy the dress only because it was very unique and couldn’t be found elsewhere. Buy the shorts only because they could be multi purposeful and worn with many different shirts. Buy neither and find shorts in a similar style elsewhere. I ended up buying just the shorts. Even though I found them to be overpriced, I believed I could eventually get my money’s worth, especially considering the high quality of the shorts.
I didn’t know this at the time, but by choosing between the dress and the shorts, I was conducting marginal analysis, which is comparing of marginal benefits and marginal costs. When I was choosing between the dress and the shorts, I had to consider what each clothing items’ benefits were and what each clothing items’ costs were. I had determined that each item’s costs were the same, but that the shorts’ benefits were greater than the dress’s benefits. Therefore, I concluded that buying the shorts would increase my utility, or personal satisfaction.
Another economic perspective I was exhibiting was rational behavior, a type of behavior that reflects “rational self-interest” and pursues opportunities to increase utility. Rational decisions may change as costs and benefits change. Therefore, if the dress were on sale, it is possible I may have bought both the dress and the shorts. Also, rational behavior changes under different circumstances, meaning that if I had gone to the mall on a different day, I may not have made the same decision I made that day. For example, if I had just been invited to a dressy party, it’s likely I would have chosen the dress. Because rational behavior means that choices will vary greatly among individuals, even though I bought the shorts because I determined that it would increase my utility, my friend may not buy those shorts because she could conclude that it would not increase her utility.
This brings us to an important point about a logical fallacy called the fallacy of composition. This is when people believe that a statement that is correct for one person is correct for every person. Again, I decided the buy only the shorts, but someone else may decide to buy both the shorts and the dress, and someone else may decide to buy none. And herein lies why economics is so complicated. There are endless possibilities of what could occur in a certain scenario; therefore, nothing is certain. But it is the job of an economist to try to predict the most likely outcome based on the economic perspective, which includes key topics such as marginal analysis, rational behavior, and the fallacy of composition. Did you notice any other economic perspectives I could have used in making my decision?
Well, since you had a certain amount of money, your options were limited. Scarcity limited your options and you had to decide between the dress and the pair of shorts. But you also questioned whether the dress you liked could be found elsewhere, which, I guess, is another form of scarcity. Since the dress is unique, you had to decide whether it was a better choice than the pair of shorts (which you bought in the end). You valued the pair of shorts more than the dress because a) you initially came to buy pants and b) shorts are multi purposeful.
ReplyDeleteYou also could have considered the opportunity costs of each possible purchase option: buying only the shorts has the opportunity cost of buying the dress; buying only the dress has the opportunity cost of buying the shorts; and buying both items has the opportunity cost of whatever else you could have done with $120. This sort of opportunity cost analysis is something my dad does all the time, especially when it comes to buying food. For example, my dad has a baseline of a cost to value ratio for food based on his favorite kind of pizza. Whenever he gets food anywhere else, he always considers how much of his favorite kind of pizza he could have bought with that same amount of money (the opportunity cost of buying pizza). If he gets more satisfaction from something that costs the same as the pizza, then (in his mind) that was a good purchase. If he gets less satisfaction than what he'd get from the same cost of pizza, then he won't purchase the other food.
ReplyDeleteI find it really interesting how you were able to apply economics to a past experience. I like how you brought up the idea of referring to yourself as a rational consumer. This helped me understand what Mr. Stewart meant when he said "People won't always do what we expect them to do in microeconomics." You said that if you had a "dressy party" coming up, you probably would have bought the dress. However, from the perspective of the producer (the store), there is no way for them to know whether or not you may have a party coming up. So, there is no way for the store to predict what you might be more interested in purchasing that day.
ReplyDeleteI really enjoyed this post because I definitely have weighed the costs with the benefits of particular items when contemplating a purchase. Although there have been times when I may have wanted to buy something, I know my utility would not be as great as if I saved my money for something I really wanted. I liked how you connected this scenario to the fallacy of composition, because each person's situation is different on any given day, so it is important to realize that a consumer's actions vary depending on what their demands are. It's most likely that you would have bought the dress if it was on sale, but also the dress is probably in high demand to other consumers, not just you, so the producers won't put it on sale, since others are willing to pay the full price for it.
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