A Seven-Year-Old Knows Her Economics

My friend Cliff was getting his two daughters ready for bedtime. The four-year-old, Emily, asked her father, "Can you read me a story? It doesn't have to be a long one." Cliff likes telling his girls stories, so he told her he would be happy to read her a story and that it could be a long one if she likes. Emily then suggested that instead of reading her one long story, he could read her two short stories. "Are you trying to negotiate with me to get more story-time?" Cliff asked, with humor, wondering if this was a ruse to trick him into telling more stories than usual.

Enter Hannah, his seven-year-old daughter who absorbs information like a sponge absorbs water. It soon became obvious that her agile little mind had encountered economics. Hannah remarked, "Daddy, if the demand for something goes up, so does its price. If Emily is demanding more stories, then the time you spend telling stories should go up also."

What a child! I should bestow her with honorary credit for four hours of my Introduction to Agricultural Economics class!

Incentives and Indifference Principle

Over the Christmas break I witnessed two events related to economics.

(1) Importance of Incentives - For some time now I have been trying to teach my daughter, Maggie, to count. I had only been able to get her to count to three. Being a two-year-old, she has a particular way of speaking. When she wants to say the number "three", she doesn't just say "three", but instead counts to three: "one, two, three". After dinner I told her she could have a dessert. Specifically, she could have M&M's. When I asked her how many M&M's I should give her, she astonished me by saying: one, two, three, four, five, six, seven, eight, nine, ten! The reward for counting finally got her to count higher than three!

(2) Indifference Principle: A local gas station recently announced it was giving away free gasoline. Do consumers benefit from this? The answer is no, for most people. After the announcement of free gas on the radio, large flocks of cars bolted to the station. In their effort to get free gas, they caused a wreck which damaged eight vehicles. Moreover, there was a terribly long line. The line was so long that many of the people who parked their car in the line soon left. The Indifference Principle states that even though the gas is free, people should be indifferent between getting their gas for free at this station, paying the cost of car wrecks and long waiting lines, or getting gas at another store where the gas comes at a price, but there are no wrecks and no lines. A similar situation exists if there is an unexpected huge demand for gas, like if a hurricane is approaching and the population must evacuate, but a gas does not price-gouge.