Core Principle 3 - The Marginal Principle - Just One More?

This is an iHeart podcast, Guaranteed Human. This message is brought to you by Kroger. If you're into entertainment podcasts, you know it's all about the details that pull you in and keep you engaged. The right details make everything feel seamless. And even when plans change, Kroger makes it easy to shift to dinner so you can still get something on the table and keep the rest of your night on track. Order online and get groceries delivered in as little as one hour. Kroger. Texas Proud since 1955. Can I help you? I'm looking for a pan that says, I know what I'm doing. Um, I don't know if that pan exists. Well, I want to get dinner party confidence. Aha, then you need copper. Go all in on what you love with the active cash card and earn unlimited 2% cash rewards on purchases. Oh, also do you sell those little finishing salts and tiny pulls? Are you a chef? Well, I made short ribs once and here we are. Be it 2% with the active cash credit card from Wells Fargo. Visit WellsFargo.com/activecash, terms apply. Most dog food brands don't really want you seeing how their food is made. Just food for dogs is the opposite. They actually invite you in. You can walk into any of their kitchens and see real human grade ingredients like chicken, beef, carrots, and peas being prepared right in front of you. It's real food made in real kitchens. Nothing is hidden behind labels and that kind of transparency says a lot. Nothing to hide. Everything to love. Go to justfoodfordogs.com and get 50% off your first order. Until now the data your AI depends on has been trapped behind ever increasing cloud fees. Wasabi created a cloud storage and is redefining cloud storage for the AI era, delivering simple predictable cloud storage for AI, analytics, media, and more. Your data is free to move, fast to access, and ready will your AI needs it. Hidden fees add up fast as AI workloads grow. Wasabi's flat pricing eliminates all of it, one rate no surprises. Learn more and try now for free at wasabi.com, wasabi, the AI storage cloud, proud partner of the iHeart Podcast Network. You're listening to think like an economist, a Himalaya learning production. For exclusive content like bonus episodes and supplemental materials for this podcast and others like it, go to Himalaya.com/econ and enter promo code econeco.com, a checkout to get your first 14 days free. It's time to think like an economist. My name is Samir Benwar, I am the owner of Milka Coffee Roasters here in Sacramento, California. I love coffee, I love the magic that is the coffee industry, and I also love my community and I want to bring those two together and give people a place to enjoy both and also each other. Our friend Samir in California makes all sorts of decisions each day and whether he's aware of it or not, he's relying on the tools of economics. Every day we have to make decisions on how many people to hire, what our hours of operations are and also how much drinks are going to cost. And it's not just about dollars and cents. We don't take tips because we don't believe in tip culture at Milka Coffee Roasters. We build that into the wage and I don't think I'm alone in this. Tip in culture is spread out of a bad business perspective, like a tip culture can be damaging to a person's psyche. They feel like now they have to do whatever it takes to get that tip from the customer, which leaves it open for customers to then abuse food service people because they know that they have the power because someone's rent depends on how much tip they give. What we're really interested in is how he makes these decisions about how many people to hire, how many hours to open his coffee shop, and how many shops to open. And he has plans to expand his empire. We're going to dive into these how many questions on this week's episode of Think Like an Economist. With me, Justin Wolfas, and I'm Betsy Stevenson. We aim to transform your life and help you make better decisions through, while thinking like an economist. Journalist and former economic student, Nazterand Tavikoli Far, joins us to dig into what you need to do to think like an economist. Hi, so right now we're going through the four principles, which Betsy and Justin you say these lie at the heart of pretty much every decision we make. So these are the cost benefit principle, the opportunity cost principle, the marginal principle, and the interdependence principle. So where are we at? This episode is about the marginal principle. Here's the fancy economist definition of the marginal principle. Decisions about quantities are best made incrementally. Basically, the marginal principle is about the question, how many? How many of what? How many of just about anything and everything? Let's stick with our friends to me, the cafe owner. Here's a bunch of how much or how many questions to figure out. How many hours should he open for each day? How many bristers should he hire? How many branches should he open? And you as a customer, Naz, may be deciding how many of his lattes you should order. And they sound delicious. They really do. And the way to figure out how many is to break each decision down into a series of smaller or marginal decisions. It's easier to answer should I hire one more barista than how many barista should I hire. Because each barista might have a different effect on your bottom line. So this is exactly what we do. Samir starts by asking should I hire one more barista? And to answer this, he should use our old friend, the cost benefit principle. So this is exciting because the principles are meeting each other now. So we're going to dig into whether Samir should hire an extra barista. Let's explore the marginal principle a bit more before we do that. The big idea is to replace a difficult how many question, with a series of should I do one more questions? It's easiest to see this by practicing. Naz, can you ever crack at this? How many pairs of shoes should I buy? Okay, so how many pairs of shoes should I buy? That becomes, I think it becomes, should I buy another pair of shoes? You're dead right. How about for people just starting college? How many classes should I take this semester? Should I take an extra class? That's it. For people who want to start a family, they often ask themselves, how many children should we have? A better question is, should we have one more child? Now, here's a trick. How about this one? Should I marry my current partner? Okay, so this isn't a question about how many or how much? I mean, it sounds like a yes-no question, perhaps even a maybe question. But it's not a quantitative question, I don't think. That's right. This is what we call an either/or question. And so it can't be further simplified. And so we've hit on an important point here. There are questions, which aren't about quantities, you know, that aren't about the how much or the how many, but are either/or questions. Asking if you should marry your partner isn't either/or question. Basically, you know you've broken a how many question down into its smallest components when you're left with either/or questions. When Samuiko is asking how many baristas should I hire? To ask whether to hire one more, he's now answering an either/or question. The answer is either yes, he should, or it's no, he shouldn't. And now he's ready to apply our old friends, the cost benefit principle and the opportunity cost principle. So let's go back to Samuiko in California and figure out how many baristas he should hire. So if we want to know if we should buy one more of something, we need to make sure the benefit from this extra thing is more than the cost of this extra thing. And how do we figure that out? Well, I'll be more specific. We want to know Samuiko should hire one more barista. We need to know if the extra benefit of that extra barista, the extra money that barista adds to the business, is more than the extra cost of hiring that barista. OK, so I delved into some numbers with Samuiko. So Samuiko, we want to get into the nitty gritty of how much each worker adds to revenue. How much does your first worker bring in in terms of revenue? Our first worker brings in approximately $600. And how about your second worker? How much did they bring in? They add approximately $300 onto that. And how about third? The third adds $100, but does add a lot of barista comfort. Each barista you add adds more comfort and ease of actually doing the job, where there'd be making sure to stock enough milk for the next rush or cleaning or taking orders while one person works on the espresso machine. And how about a fourth? For us personally, four would be cumbersome. We have a pretty small space. And we just couldn't fit four people. People would just be running into each other and knocking each other over. Would you know how much each worker adds to your costs? So each worker during a six-hour shift costs $104, including taxes. OK, so let's stop here. Samir High is three baristas. We want to see if this is a watch. choice. So basically we're saying he should keep hiring as long as the marginal benefit from an extra worker is more than the marginal cost of each worker. That's right. And so the marginal benefit is the revenue each worker adds to the business. Would the marginal cost be the wage of an extra worker? Exactly. Which in this case is $104 with taxes. So let's see if you can go through this. Okay. So the first worker adds $600 to revenue, but only $104 to cost. So it's a no-brainer. He needs to hire at least one worker. That's right. Now what about the second worker? They would add $300 to some misrevenue. And we say their marginal benefit is $300. And the marginal cost of the second worker is their wage, which is $104. So the marginal benefit of that second worker is more than their marginal cost. That's $300 versus $104. So it makes sense for somebody to hire the second worker. Right. Now what about hiring a third worker? If somebody hires a third worker, he told you it would add $100 to his revenue. Should he do it? Okay. So the marginal cost is still the wage, which is $104. That means he'll spend more hiring the worker than what they'll bring in. The marginal cost for Samir is more than a marginal benefit. So it's probably better if he doesn't hire this extra worker. Yeah. Though Samir does say that the third worker makes things run more smoothly. So it turns out that he really values that piece of mind, which is why he thinks the benefit is a bit higher than just the extra revenue involved. So that's probably why he hires the third worker. And also it's really hard with people, right, because you can't hire 2.7 workers. Yeah. But it's still an important rule to remember. The marginal benefit needs to be more than the marginal cost. When you learn to apply the marginal principle to everything you do, economists call it thinking at the margin. That's because you'll always be thinking, should I do a bit more or a bit less of this. And honestly, if you just blurred out the phrase at a dinner party, thinking at the margin, you'll impress all the economists in the room. Okay, so let's practice some more and let's stick with some his favorite topic, which is coffee. So here's my question for you, Nas. How many cups of coffee should you buy today? Nas, you need to break this how many question down into steps. Should you buy one more cup of coffee? If the answer is yes, then you keep repeating this until the marginal benefit of one more cup of coffee is no longer larger than the marginal cost of a cup of coffee. If you could buy fractions of a cup of coffee, this means you'll keep buying coffee right up until the point that the marginal benefits equal to the marginal cost or just a smidge less. Okay, so the big idea is I should keep buying coffee until the marginal benefit is equal to the marginal cost. So this sounds like an idea I can apply to just about anything. Bingo, that's exactly the point. This big idea applies to any decision you make about how much of something to do. Economists call it the rational rule and it says if something's worth doing, keep doing it until the marginal benefit is equal to the marginal cost or as I like to say, anytime your marginal benefits are greater than your marginal cost, you know that's something that's going to make you better off. And that right there is what a whole lot of economics is about. Lots of decisions. How many cups of coffee to buy? How many baristas to hire? How many hours to work? And so on. They're all how many questions? And much of economics is about one simple answer. Keep doing it until the marginal benefit is equal to the marginal cost. Now it's time to impress the economists at your next dinner party by applying this rational rule. And just so you know when economists are at a dinner party, we keep eating until the marginal benefit of one more bite of dessert is equal to its marginal cost. So say you're a producer of coffee. How many tons of coffee should you produce? It's a different question, but it's pretty much the same question. How many question? Should you produce another ton of coffee? And the answer is that you should continue producing coffee until the marginal benefit of producing an extra ton of coffee, which is basically the wholesale price you can sell that ton for equals the marginal cost of producing another ton of coffee. And how about if you're exporting coffee beans? How many tons do you export? Guys, it's the same thing. Keep exporting until the marginal benefit of exporting coffee is equal to the marginal cost of exporting coffee. The marginal benefit of exporting coffee is the price you can get from selling it. The marginal cost is the cost of literally shipping the coffee to the buyer as well as the price of the coffee. And here's the thing. Follow the rational rule and you'll make the best possible choice. It's a shortcut to that blissful point where your world is as happy as it can be. Okay, so that was the marginal principle. Let's summarize. The marginal principle creates a really good structure to simplify complicated how many questions. Break it's question down until you ask about whether you should choose just one more of something. And then it boils down to the rational rule, which says choose the quantity with a marginal benefit equals the marginal cost. Follow this rule and you'll make your best possible choice. Now we've started to put the core principles together. When you apply the marginal principle, you'll simplify each question down to its smallest component. And that's when you'll use the cost benefit principle and the opportunity cost principle to make your decision. But we still have one more principle to go and that's the interdependence principle. Betsy, Justin, thank you so much. So while we're waiting for the next episode on the interdependence principle, what can I do to start practicing thinking like an economist? Well, I always say that economics is a muscle and you'll develop that muscle by working it out. So this week, as you go about your life, take note of each time you find yourself making a how many decision. And for each decision, think about the marginal benefits. Think about the marginal cost and ask yourself whether you're following the rational rule and choosing the quantity where the marginal benefit is equal to the marginal cost. That's it for now. See you next episode for the interdependence principle. I'm excited to talk about it. Until then. Keep never seen me put a cookie down halfway between and just be like, you know the rest of this cookie's not worth its cost. To get the most out of this show, check out our bonus episodes and supplemental materials available only on the Himalaya Learning Platform. Himalaya Learning provides bite sized courses from world-class thinkers and industry experts such as Ariana Huffington, Malcolm Gladwell, Tim Ferris, and more for you to enjoy in the app on the go. To get the most out of this podcast and others like it, go to Himalaya.com/econ and enter promo code Econ, e-c-o-n, a checkout for your first 14 days free. This message is brought to you by Kruger. The right details make everything feel seamless and even when plans change, Kruger makes it easy to shift dinner so you can still get something on the table and keep the rest of your night on track. Order online and get Grocery's delivered in as little as one hour. Kruger. Texas Prouds since 1955. Hi there. What are we planting? Tomatoes. The kind people will talk about. Oh got you. I want to grow tomatoes that start conversations. Have you thought about heirlooms? They are very provocative. Yes. Last summer I kept basil alive for four months. Did you see I knew you were a real gardener? Be a 2%er with the active cash credit card from Wells Fargo. Visit Wells Fargo.com/ active cash in terms of life. Think about it. When it comes to your own food, you can walk into a restaurant, see what's being made and know exactly what you're getting. But with dog food, most brands keep that completely hidden. Just food for dogs does the opposite. They've built their entire brand around open kitchens. You can actually walk in and watch them prepare your dogs meals with real human-grade ingredients like chicken beef, carrots and peas cooked right there in front of you. No mystery, no behind the scenes you're not allowed to see. That kind of transparency is rare in the pet food world. And it's a big reason they've become the number one vet-recommended fresh dog food. Earning trust from pet parents who want to feel confident in what they're feeding. When a brand is willing to show you exactly how your dog's food is made, it says a lot about the care, quality and standards behind every meal they produce. Nothing to hide. Everything to love. Wasabi created a cloud storage and is redefining cloud storage for the AI era, delivering simple, predictable cloud storage for AI, analytics, media and more. Your data is free to move. Fast to access and ready will your AI needs it. Wasabi's flat pricing eliminates all of it. One rate no surprises. Learn more and try now for free head wasabi.com wasabi the AI storage cloud. partner of the iHeart podcast network. This is an iHeart podcast. Guaranteed human.