Wednesday, April 30, 2008

Higher Prices: It's Not Just the Money

For people who fly regularly, this summer is not shaping up to be a pleasant experience. Airline travel is becoming more expensive (subscription required). Part of this is due rising fuel costs (subscription required). Other contributing factors include an worsening shortage of trained pilots (subscription required). Both of these mean rising costs that are passed on to consumers. Some airlines are even charging extra (subscription required) for a second bag.

But this environment also offers a great lesson for those of us who teach economics and personal finance. The lesson is a fundamental one that sometimes gets left out due to lack of time. That lesson is analyzing cost.

Now some of readers are saying "I have the students do comparative pricing," and others are ready to respond with "My students can graph fixed and marginal cost vs. revenue". But that's not the whole story. There are non-financial costs that figure into or should figure into our students' decision-making. While we may agree that it is important, we're sometimes at a loss of how to proceed.

Higher costs are causing airlines to cut flights and fill every seat (FREE content). And mergers usually have a way of translating into fewer flights (FREE content). This means that more of your time may be spent getting through security lines, checking bags (for that extra fee), and waiting for connections. But what is time worth? Some students may respond with "I'm on vacation, so it doesn't matter." But any of us who have been stuck in a terminal know that's not true. As with our finances, so it is with our time. There's something called opportunity cost. Instead of sitting in a terminal, waiting for the airplane, you could have been spending more time at home, at your vacation site, or just about anywhere else.

What's your time worth? The simplest way to measure this is to ask "what's your wage?" Your wage is a market approximation of the value of your time. You may say you're underpaid. Heck, your boss may even agree with you. But the fact is your wage is the economic value of your time as it applies to at least one activity.

Another way (although less specific) is to look at emotional and other costs. How does whiling away time in the terminal make you feel? Angry? Anxious? Bored? Those are all valid reactions and affect your emotional satisfaction received from the trip. If it's negative, it reduces the satisfaction. And if it increases your blood pressure...

The point is that choosing to fly encompasses more than a financial decision. This is increasingly so in the current environment. And students should understand that all these factors are valid ones in considering whether to fly...or to look for available substitutes such as trains, autos, or just putting that trip off to another time.

I welcome your comments.

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