When tipping, we all have a tipping point. It might sound reasonable to leave a dollar tip. But, if a Tall Vanilla Latte costs $3.37, is a thirty percent tip too much? Yes, says one NY Times blogger. On the other side, Starbucks baristas say that they earn more from tips than hourly pay. After a California court decided that Starbucks’ shift supervisors could not share the tips pool, an appeals court reversed the decision.
Another way in which customers are asking themselves, ”How much extra?” involves calories. With New York City the first in 2008, municipalities around the nation are requiring that calorie information be posted. Has it made a difference? According to a Stanford Business school study, yes.
The Economic Life
Starbucks’ customers and employees both are wearing their economic lenses. Whenever they consider the cost and benefit of something extra, they are thinking at the margin. Thinking at the margin is thinking economically.
Looking at a paper by law school professor Herwig Schlunk reminded me that attending law school is similar to inventing a new machine. Both require an initial investment, both take several years to complete, and both will generate a private and social return. Also, they both result in capital creation.
Dr. Schlunk’s paper focused on three hypothetical law students: Also Ran, Solid Performer, and Hot Prospect. Looking at ROI (return on investment) with opportunity cost, borrowing costs, and future income as important considerations for each prototype, the professor concluded that law school for most might not be a wise investment.
Wearing economic lenses, Dr. Schlunk sees evidence of costs all students applying to all schools might consider.
The Economic Life
Rather like a recipe, land, labor and capital are the ingredients we use to make all of our goods and services. While all three are important, capital plays a special role. In his recent book, The Wealth and Poverty of Nations, Harvard professor David Landes explained why certain nations have experienced an increasingly better standard of living while others have stagnated. Looking at the variables he cites, physical capital which includes tools and machines, and human capital which involves education, entrepreneurship, and health, are most crucial for economic growth. Physical and human capital provide the highest ROIs.
Great cost benefit analysis in yesterday’s Wall Street Journal.
How do we decide whether the cost of intensified airport security is worth the benefit?
1. The TSA says that one life saved is worth $3 million spent. That means, though, that we have to prevent 1,150 fatalities per year to make the added expense valid.
2. Instead, let’s consider expense to be time. The estimate is an extra 15 minutes per person. For the vaaction traveler, we could assume the cost is worth it. However, for millions of business travelers, do we want 15 minutes lost? 4 million hours? Will that impact GDP and jobs and recovery?
opportunity cost: the most desirable alternative that is sacrificed when a decision is made. Choosing is refusing.