Friday, October 23, 2009

The Economics of Getting Wasted

BACKGROUND: This was a class assignment for one of my economics classes awhile ago. Cool beans.

Why would anyone opt to purchase a small case of beer rather than a big one?

When you purchase a large quantity of beer, you may not drink it all that night or on that weekend, but you'll eventually drink it. So why would anyone ever get something like a six-pack when the marginal cost per beer is higher than if you would get the largest case of beer available?

This not only applies to beer, but to types of hard alcohol as well. A large amount of people opt to purchase their alcohol in quantities of six beers or 375ml of hard alcohol. The economic option for anyone who engages in the regular consumption of alcohol should be to buy as much as they can when they are in need of it. One fundamental assumption of this study is that there is no difference in quality when purchasing alcohol in bulk, unlike other goods, such as fruits. A person saves money by buying large amounts of alcohol at the point that they need it, provided they have ample funds to do so. Say a person purchases six beers and 375ml of hard alcohol per week, and another purchases fifteen beers and a 750ml bottle of hard alcohol every two weeks. The second person's choice is much better. He saves money by not having to make the trip to the liquor store, thereby saving him the cost of time and gas. He also saves money because buying alcohol in higher quantities means a lower marginal cost per unit of alcohol.

Another economic situation within this example is the liquor store. The liquor stores realizes it is economic for people to purchase large amounts of alcohol, and the price reduction is clear when you purchase a larger amount of anything in the store. They are encouraging people to buy more alcohol because they make a bigger profit in the short run, and people realize they save money in the long run. Now what about the liquor store's profits in the long run? It seems as though the liquor store would eventually lose money. Logic dictates that if people are saving money from buying alcohol in the long run, the liquor store will lose money in the long run, but this is not the case. The liquor store keeps the short run profits up because people are constantly purchasing alcohol, until they grow too old. By this point, younger people have substituted for them. The consumer turnover helps keep up these profits. The liquor store's short run profits are also its long run profits, and people are still able to save money in the long run.

A reason why someone might purchase a small amount of alcohol is the opportunity cost of purchasing a large amount. When you do purchase a large amount of alcohol, depending on your lifestyle, you sacrifice your public image. People will assume you are an alcoholic or at least a heavy drinker if they see you with such large amounts of alcohol, when in fact, you're just an economist. The opportunity cost is how much you are willing to sacrifice your public image for the money saved by buying alcohol in large amounts. For many people in university, the trade-off is simple, because you're surrounded by people that value alcohol and saving money(no matter how much) over public perception. As we grow older, we associate in smaller group gatherings and public perception's value becomes much greater. The value of money, time and gas saved by purchasing large amounts of alcohol is often substantially less than the value of public perception for people looking to earn the respect of their peers.

The same opportunity cost is evident again, at the liquor store. There is a 3 litre unit of alcohol, called a Texas Mickey, that can be purchased in the store. Previous arguments show that this unit will have a marginal cost lower than that of a smaller unit of alcohol. However, this is wrong in this particular case. A Texas Mickey is an item that cannot be practical for anyone attending any sort of gathering, with the exception of a big party. People attending this sort of party will find it appealling, and these are the type of people that do not value sophisticated public perception. It should be recalled that the trade-off for public perception is the money saved. Again, this isn't the case. Since Texas Mickeys are very likely to be purchased by groups of these people, the marginal cost is still low per person because they'll split the bill, and they get the added value of the novelty of the item. They'll still have a low marginal cost, despite the fact that the Texas Mickey has a higher cost per unit of alcohol. That is why the liquor store is able to charge more for a Texas Mickey.

What we've seen is that it is economically feasible for someone to purchase large amounts of alcohol at the point where they need it. Someone who opts to purchase a small amount of alcohol values their public perception over the value of money, time and gas saved.


Inbred Nation said...

Thats was kinda shitty.

Inbred Nation said...

But more on point, I buy alcohol in bulk because it saves money and it makes me look wicked cool.

don't feel like signing in said...

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