Friday, September 13, 2013

Transaction Costs of a Family Business

College is a busy time for everyone, especially those who want to juggle part-time work, a heavy course-load and/or extra-curriculars, all on the same platter. As an undergraduate, I have met many students who have spoken about the opportunity costs of either studying hard and getting perfect grades or engaging in many extra-curriculars for a social edge, at the sacrifice of achieving a high semester GPA. Part-time work can be a very large commitment for college students, especially if he or she decides that the work is not a good fit shortly after becoming employed or if the time put into the job turns out to be inconvenient and gives the student a substantial amount of stress. I have a close friend in Chicago who is an engineering student and used to have a part-time job working in her family convenience store. My friend had been contributing to the store since she was 14. By the time she was in high school, her commitment to her family business had become a part-time job and her parents expected her to work at the store 3-4 hours a day. In high school, my friend was active in the Asian American Club and Key Club. Homework was also not a big issue for her so it seemed that the part-time job was not a bother at all at the time.

When my friend enrolled into IIT as an electrical engineering major, she had her mind set to continue working at the convenience store. She believed that she would be able to juggle her course-load and her family commitment without too much sacrifice on her grades. Her parents were still pretty staunch about her help around the store as their proficiency in English was not high, they did not want to hire too many "outside" employees, and they only trusted family to work the cash register. For the first week, my friend was able to prioritize her time well and managed to keep on track with all of her coursework. However, when the course material started increasing in difficulty, she immediately felt the weight of her responsibilities, especially for her physics II and engineering project courses which took up a lot of her time. Eventually, after taking her first midterm, my friend decided to let her parents know that she will be putting in less time in at the store, certainly not daily work, and her parents finally decided to let her off. Her brother has taken over her work as the cashier ever since.

There were undoubtedly many costs associated with my friend's circumstance. For one, even to start the family business was a substantial investment on the part of her parents. Living in neighborhood where there were other convenience stores a block away, starting a convenience store can be very risky if you aren't knowledgeable of what suppliers to do business with, what contacts you should have for transportation of goods, or even an acceptable rent rate if you are leasing property for the store. Luckily my friend's family steadily began making a profit and, as of now, the store is still open. Another transaction cost that I elaborated on was my friend's cost of study time. Once she made the agreement to work at the store after her classes were finished, she was giving up time she could have spent studying over material or joining clubs. Yet another transaction cost, though unique to her, was forgoing pay that may have been higher than what she was being paid had she decided to work somewhere else. Sometimes, steep transaction costs are overlooked if the job means a lot to a person, even if the payoff is less.

Friday, September 6, 2013

Who is David Ricardo?

David Ricardo (1772-1823)
The British political economist, David Ricardo, was born in London, England on April 18, 1772 as the third of 17 children in a family of Portuguese origin. When he was 21 years old, David married outside of his Jewish faith with a Quaker, Priscilla Anne Wilkinson, and his family disowned him as a result. David's father was a successful stockbroker and naturally David supported himself by making his own stockbroking business, using connections he made when he worked with his father. David became interested in Economics when, at the age of 27, he read Adam Smith's The Wealth of Nations. At age 37, he wrote his first economics article, and spent his remaining 14 years as a professional economist.

David was one of the most influential of the classical economists. In addition to being an economist, David was also a member of Parliament, a businessman, and a speculator. In 1809, David wrote about the Bank of England's propensity to issue excess banknotes. On this, he wrote about England's inflation and was an early believer in monetarism. In 1815, David wrote about what came to be known as the law of diminishing marginal returns in his Essay on the Influence of a Low Price of Corn on the Profits of Stock. David also opposed the protectionist Corn Laws because they restricted imports of wheat. He was an advocate for free trade and formulated the idea of comparative costs which is known today as comparative advantage, the basis for free trade advocacy. David observed that gains will come if each country specialized in producing the good for which its comparative cost is lower. Ricardo was known for arriving at his complex conclusions without any of the mathematical tools deemed essential by modern economists. For example, David's theory of rents, that landowners and not tenants were the ones who profit from productive farmland, was arrived at without math. His theory of rents is still used today to explain such things as why agricultural price supports help owners of farmland rather than farmers, or why a restriction on the number of taxicabs benefits those who own taxi medallions and not necessarily all cab drivers.

I never knew who David Ricardo was before before being assigned this alias and I am surprised I learned so many of his concepts without knowing he was responsible for finding them. I am glad I was able to learn more about him through various informative websites. I learned a lot of his key concepts like the law of diminishing marginal returns, inflation, free trade, and comparative advantage, in intro to macro- and micro- economics. I think some of his findings could definitely fit with the economics of organizations since they helped set the foundation of contemporary economics. For example, the theory of rents in relation to factories leased to companies for production/manufacturing or law of diminishing marginal returns for analyzing worker output in the organization's working environment.