Inflation Auction

We got the idea for this inflation activity here. This one was SO FUN. And it did a good job showing how a minimum wage leads to higher prices. Here's a video talking about that, too. Also related: It seems like everyone asks the question at some point or other, "why can't we just print more money?" And it's surprisingly hard (for me) to explain! This video does it pretty well.

We had been using our family currency for awhile by the time we had this auction, so most of the children had earned some money. I was glad to have that because I think the activity was more effective when the money wasn't simply handed out at the beginning—it had been earned through doing actual work, and thus had more value to the children themselves. (We could also have used real money, but none of them really have very much.) There was some definite disparity, though: Abe had earned a TON of family money, because he's a hard worker and that's just the way he is—he loves to earn things and keep track of things and go the extra mile. The others had made proportionally less, and Goldie and Junie almost nothing.

I bought some special candy, things we hardly ever have and certainly the children never have all to themselves! And then I proceeded to auction them off. The first "year," two packages of Lindt truffles went for $3 and $2 respectively. The two children who won those items were very, very pleased with themselves.

Then I pointed out how sad it was that Goldie and Junie didn't even have enough money to buy ANYTHING. (They had $2 and $1 each, I think.) I instituted a $2 minimum wage for "Year 2" so that everyone would at least have enough to bid with! But in Year 2, the same kind of package of truffles was sold for $7! And a pack of Skittles went for a whopping $22.

Now our poorest citizens didn't have NEARLY enough to buy something! I raised the minimum wage to $4 for Year 3. The next package of Lindt truffles sold for $15! The Starbursts fetched $45 from Abe, for whom money was really no object. I auctioned off one more thing, a Ritter Sport bar, and Seb paid $49 for it! And the poor little girls still didn't get anything. All that had happened was that the prices had gotten even more out of their reach!

I must admit that I was very pleased that everything proceeded like such a textbook case. I didn't have to manipulate or encourage or anything—that's just what our prices did naturally as the amount of money in the system increased (and the value of it, necessarily, decreased). It was also interesting—I had given the children a big lecture on being good sports and not getting mad if they didn't get something, and so forth. And they were really good about it (and I did give Junie and Goldie some little candies of their own later, so they got something too) :), but there was some regret—especially for people that didn't bid aggressively during the first year, and later paid so much more for the same items. And Sebastian regretted it SO much that later he arranged a little side trade with Malachi, unauthorized by me and unregulated by the usual market forces. There, in the Black Market, where there was little competition, he paid $71 for one bag of Lindt Truffles! And that was a wonderfully apt object lesson as well.

Brands, Profits, and Marketing

I found this "Snowman Soup" activity online and it seemed like a good way to talk about profits, brands, and marketing. The activity as written is great for older kids (it has some worksheets for figuring out gross and net profit, etc.); I modified it a bit for the younger ones and put more emphasis on the packaging too. Sam is always talking to his college students about the importance of having an audience in mind when you create anything, and this is no different. We tried to think about WHO we were trying to appeal to, and what kinds of messages we could convey with our logos, fonts, packaging, etc.

Along with this activity, we discussed the economics of company branding. It's an interesting thing to think about! As someone who grew up in a household that always emphasized what a waste of money it was to buy "brand-name" products, I was interested to read this several years ago in Basic Economics:

(page 504) Brand names are often thought to be just ways of being able to charge a higher price for the same product by persuading people through advertising that there is a quality difference, when in fact there is no such difference. In other words, some people consider brand names to be useless from the standpoint of the consumer's interests. 

In reality, brand names serve a number of purposes from the standpoint of the consumer. Brands are a way of economizing on scarce knowledge, and of forcing producers to compete in both quality and price… 

Brand names are not guarantees. But they do reduce the range of uncertainty. If a hotel sign says Hyatt Regency, chances are you will not have to worry about whether the bed sheets in your room were changed since the last person slept there. If the camera you buy is a Nikon, it is unlikely to jam up the first time you wind the film… 

Like everything else in the economy, brand names have both benefits and costs. A hotel with a Hyatt Regency sign out front is likely to charge you more for the same size and quality of room, and accompanying service, than you would pay in some comparable, locally-run, independent hotel if you knew where to look. Someone who regularly stops in this town on business trips might well find a locally-run hotel that is a better deal. But it is just as reasonable for you to look for a brand name when passing through for the first time as it is for the regular traveller to go where he knows he can get the same things for less. 

Since brand names are a substitute for specific knowledge, how valuable they are depends on how much knowledge you already have about the particular product or service…

Well, there's more, of course, and all of it good. But I can't reprint the whole book here! One more section, though, that provided a jumping-off place for our discussion about profits:

(pg 514) The performances of non-profit organizations shed light on the role of profit when it comes to efficiency. If those who conceive of profit as simply an unnecessary charge added on to the cost of production of good and services are correct, then non-profit organizations should be able to produce those goods and services at a lower cost and sell them at a lower price, [thus] taking away the customers of profit-seeking enterprises and increasingly replacing them in the economy. 

[However,] increasingly the opposite has happened: non-profit organizations have seen more and more of their own economic activities taken over by profit-seeking businesses… that can do the job cheaper or better or both.

And

(pg 523) Markets are often criticized for permitting or promoting greed. High prices are often blamed on greedy sellers. But "greed" is seldom defined. Virtually everyone would prefer to get a higher price for what he sells and pay a lower price for what he buys. Would you pay a dollar for a newspaper that was available for fifty cents? Or offer to work for half of what an employer was willing to pay you? 

Would adding a string of zeros to prices or salaries change the principle or the definition of greed? It is hard to see why it should… If it refers to people who desire far more money than most others would aspire to, then the history of most great American fortunes—Ford, Rockefeller, Carnegie, etc.—suggests that the way to amass vast amounts of wealth is to figure out some way to provide goods and services at lower prices, not higher prices. 

Back in the nineteenth century, Richard Sears was ferociously determined to overtake Montgomery Ward, the world's largest retailer at that time, and worked tirelessly for incredible hours toward that end, sometimes taking business risks that bordered on the reckless. Sears sought out every way of cutting costs, so that he could undercut Ward's prices, and every way of attracting customers away from his rivals. He did all this, not because he did not have enough money to live on, because he wanted more—and he wanted his company to be number one. If that is our definition of "greed," then he was greedy. More important, in this case as in many others, it was precisely such greed that led to lower prices. 

See here for more (and read the book for even more!).