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Thursday, March 10, 2011

Cost vs Price

            For an economist, “cost” and “price” are not interchangeable terms.  The “price” of something may well be a component of its “cost.”  However, cost includes anything that we give up in order to acquire something else, while price specifically refers to just the cash we shell out to get it.

College degrees have a price (tuition) and a cost (tuition AND 4 years of your time, the stress of leaving the comfort of home, etc.).  In taking a job as a taxi driver, one must pay the price of a cab, license and medallion, as well as a cost in foregone opportunities, like giving up on an ambition to be a butcher, baker or candlestick-maker instead.  

Let me give you a specific illustration.  A block away from my apartment, there is a small corner store.  It sells things like beer, candy, ramen, smokes…you know, just the staples of a daily existence.

Like most convenience stores, prices there are a bit higher than you would expect to find at, say, a conventional supermarket.  But that little corner shop does a great business!  People are in and out all day.  Are these folks just oblivious of the better deals at the grocery store?  Or are their houses cluttered with dollar bills they’re just eager to be rid of?

While prices are high at the corner store, the cost of shopping there is not.  That’s because items at the supermarket have an additional cost that doesn’t show up on my receipt: inconvenience.  It takes time, gas, and a bit of planning/foresight to shop at the grocery store.  The trip needs to fit into my schedule, and it can’t take up too much of my time.

The cost of supermarket shopping is even higher for my neighbors who don’t have a car.  Checking a transit schedule, waiting for buses, paying the fare and lugging all those bags around a crowded bus is a significant inconvenience, one most people would be happy to do without. 

By shopping at the corner store I am able to avoid all the non-monetary costs supermarket items carry.  I can get there and back in minutes.  I can stroll over and pick up some noodles while my water boils.  I can pop over on a whim, and just check to see if the store stocks a certain item without feeling like “I’ve wasted a trip” when, come to find, they don’t.  Considering all my savings on costs, the prices at the corner seem pretty fair.

Think of it this way: imagine there’s only one grocery store in your area.  It’s 5 miles from your house.  Now picture a guy in your area starting a service whereby you can send him to the store for you, and he’ll deliver your purchases, for a fee.  Say, 50 cent or a dollar per item.  No order is too small, and he’s operating at anytime you pick up the phone.  Oh yeah, and he can have that delivery made in minutes.

Doesn’t sound too bad, right?  Conceptually, this is exactly the service corner store provides.

The shopkeeper’s markup compensates him for the reduced sales volume he’ll have as a result of his locational choice, since his customer base will be restricted to just people who live near the store (unless the houses in the neighborhood are extremely pleasant to look at, who’s going to go out of their way to buy Spaghetti-Os and dish soap at his place?), and a balance is struck.

So next time your friend grumbles about the prices at the campus store, or you find yourself doing a little double take at the hospital reception gift shop, keep in mind that while the price may be more than you’d like, the hassle you’re dodging may well be worth the extra ding to your wallet.


  1. I had a really boring high school economics teacher.

    He needs to read this blog.

  2. My high school econ teacher just taught us that we should earn more than we spend, and we'll be okay...