Saturday, 26 November 2011

False Economy

Growing up my dad loved a sale, he would line up and be so proud to score a deal. When I buy something on sale, I still talk about how much I saved instead of how much I spent.
At this point in my life, I'm trying to consume less, and create more. Which brings me to this post's topic I'm undertaking the seamless pledge in part to save money. Making clothes is much cheaper than buying new, especially in New Zealand. As such, I have spent $100 in the last month on patterns and fabric. Which made me think, if I were not sewing, how much would I have spent?

In economics when the price of a good falls (as would happen if I switch from buying new to making it myself) there are two effects. Consider for a minute that I only consume chocolate and clothes If the price of clothes falls, I can now afford more of both chocolate and clothes.

Income Effect
- The increase in consumption due to the additional purchasing power experienced when a price falls.

This means that I will buy more clothes (or sew more clothes) but doesn't imply that I spend more money on clothes (because they're cheaper).

The second effect is that clothes are now cheaper relative to chocolate. For example assume that previously I chose between consuming 5 chocolates, or 1 shirt, and now my choice is between 5 chocolates or 2 shirts. As a result I may now switch from eating chocolate to making more shirts because I can get 2 shirts for every 5 chocolates I give up instead of just 1.

Substitution Effect - The change in consumption from one good to another due to one good becoming cheaper relative to the other good

This will lead to me spending less money on chocolate and more on clothing, because clothing is now cheaper relative to chocolate.

So, to make a long post short, essentially economics tells me that by switching to a cheaper form of clothing (i.e making my own), instead of spending less on clothing, I will now spend more!

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