Incremental Costs or Why I Eat Out

Oct 19, 2009 by Adam C. Powell, Ph.D.

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.