Incremental Costs or Why I Eat Out

Oct 19, 2009 by

Chicken Banh Mi

Chicken Banh Mi

I like to eat Vietnamese barbequed chicken sandwiches (banh mi), which I purchase for a small shop. They cost me $4 a piece. People often say that it would be cheaper for me to make my own. Perhaps, but how much is this sandwich habit truly costing me? Obviously, the sandwiches cost $4. But, my typical alternative is not to starve. Instead, I would likely eat something else, such as a homemade banh mi. The cost of going to a shop for my sandwich is not $4, but instead a lower incremental cost.

If I were to make a banh mi myself, I’d need a roll (50 cents), some chicken (75 cents), a sprig of cilantro (15 cents), a carrot (25 cents), and a sliver of jalepeno pepper (20 cents). The problem is that one cannot buy a sprig of cilantro or a sliver of jalepeno. The minimum efficient scale of production is probably to make about five such sandwiches at a time. If I only plan on making one sandwich, I will have to buy a whole jalepeno for $1, 80% of which I will not use. If I only wish to produce one banh mi per week, the excess ingredients will rot before I can produce my next sandwich. So, the cost of the ingredients for this inefficiently produced sandwich is likely a bit higher, say that I need four rolls ($2), a pound of chicken ($3), a bunch of cilantro ($1), a bag of carrots ($2), and a whole jalepeno ($1). Now, making the single sandwich has gone up from costing $1.85 to costing $9! I’d have to eat at least three sandwiches to have saved money over having bought one at the store ready-made. But, it gets worse. Making said sandwich takes about 12 minutes (including the extra grocery shopping time and cleaning), or 20% of an hour. My time has value. At efficient production, I must work for 12 minutes in order to save $2.15 (the incremental cost). If I could alternatively earn over $10.75 per hour, I’ve actually saved no money at all! This little story isn’t about sandwiches. The moral is simple – if one cannot produce something on efficient scale or the value of one’s time is substantially higher than that of the person who needs to be hired to complete a task, it often makes sense to simply hire someone else. Even if the ingredients in the sandwich were free, it would not make sense to spend time preparing it if the¬†value of the alternative use of one’s time is greater than $20 per hour.

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