Of Mice & Rationally Self-Interested Men

By Joel Werre (section 01, Spring 2011)

It never fails. On the coldest day of the year, something, usually something tethered to the heating system, reaffirms my belief in Murphy’s Law. On New Year’s Eve, my dinosaur of a furnace finally died. In the weeks leading up to this catastrophic failure, I had been researching the new heating unit I wanted.

Let me explain, no one ever gleefully skips down the aisle at Lowe’s when they are faced with the prospect of purchasing a new furnace. There are a host of other items that most would rather spend five thousand dollars on; even doubling up on a mortgage or vehicle payment seems comparatively more enjoyable.

Thinking about the alternatives to not buying a new furnace, I pictured myself huddled up with a blanket draped over my shoulders standing in front of my kitchen stove. My thoughts wander as I recall news reports of some people who accidentally set their homes on fire while using the kitchen stove as a heater. Better to not tempt fate as it relates to natural selection, more over my recent affirmation in Murphy’s Law quickly dismisses the notion. I think of my wood burning stove, waves of nausea wash over me, splitting wood, I’ve done enough of that for three lifetimes in my years living in Alaska. This purchase was definitely not considered a “want,” but rather, the alternatives seemed even less desirable. It was in my best interest to make this purchase. I therefore decided it was a need. Armed with that psychological exoneration, and my visa card, I depleted my savings account by a sizeable, nay, painful amount.

There it was, one third of the size of the unit it was replacing, and complete with its own tax credit (which I immediately used to help marginalize the cost of the new unit), my new furnace. I never felt more blasé about a large purchase.

I wonder what I would have used that money for had I not needed to buy a new furnace? What if I wouldn’t have spent it on anything? Isn’t there something to be said for just simply having cushion money? These are all thoughts from a buyer’s perspective. I wonder how the companies who manufacture these heating units decide which competitive features they will include in their models. If a consumer needs your product, they are going to have to buy from you or your competitors, and as long as you pack more bells and whistles into your product per dollar, you will probably come out on top. That raises the question of how many bells and whistles per dollar are profitable? Do potential consumers of heating units care about certain features more than others? Of course they do. How many people decide against a certain brand of heating units because they lack the sleek aesthetics of say stainless steel? The latter may be a more pertinent criterion for consumers who are interested in buying a refrigerator, but because of the location that most heating units perform their duty (usually basement utility rooms), they aren’t a showcase piece. So essentially, these companies know that there is profit to be made in the production of an arguably boring and comparatively ugly product. The product they produce is however considered in the minds of most consumers a necessity, and that is what makes their product beautiful in their dimly lit, number crunching, LED eyes.

At what point do necessities shift from inelastic to elastic in the minds of consumers? Some other necessities in most modern economies are gasoline, food, clothing and shelter. The reason firms don’t blindly increase prices is because at some point even the most basic necessities would tip the scale of market equilibrium and create a shift in consumer behavior, which would in turn create a shift in the products offered on a given market, and the quantity of those products offered by the firms who produced them. For example, if my new heating unit would have cost twenty thousand dollars, would the prospect of splitting firewood seemed more attractive? Of course it would, I would have needed to take out a second mortgage on my current house just to afford the heating unit. The value of the function of the product would have displaced any counterbalancing benefit because of its prohibitive cost. The same example could be used for gasoline. If gas costs increased to say ten dollars a gallon, any inelasticity would probably snap, a shift in consumer behavior would most likely occur on a large scale, public transportation would be in high demand, and the market for Escalades and other gas guzzlers would evaporate.

I say this under the assumption that all economic agents operate as rationally self-interested parties. That is how I know that the consumer at the gas pump would not be willing to spend $250.00 on one tank of gas; they would alter their behavior in a rationally self-interested manner. The same idea is true regarding the firms that offer low mileage vehicles (or perhaps even all vehicles). All those truck commercials where they drop a crate of bricks into a gas chugging four wheel drive pick-up would be replaced with the latest greatest rickshaws, and the very best shoes to use while transporting your friends around on said rickshaw; a new paradigm in complementary goods indeed, but I digress.

The balance we call market equilibrium is a product of the nature of economic agents. We understand that nature to be rationally self-interested. While sellers are looking for getting the most profit for their product, buyers are looking to get the most product for their money. These two divergent forces keep each other in equilibrium because they are acting in the same manner and only separated by which side of the cash register they stand.