Mankiw's ten principles of economics

¶ … Mankiw's Principles Of Economics

When consumers elect to invest in discount offers by merchants, they are faced with a number of variables that will affect the value they perceive from the discount offered compared to the amount of money and time that will be required to secure it. To the extent that this cost-benefit analysis results in a perceived positive return on their investment will likely be the extent to which consumers are more likely to invest in discount offers. To gain some fresh insights into this tendency, this paper provides a review of the literature concerning Mankiw's first four principles of economics as they apply to a vignette involving consumers spending more than they planned to obtain a discount card that will only provide them with discounts in the future. A description of some salient examples and evidence in support of the rationale involved in this decision-making process is followed by a summary of the research and important findings concerning Mankiw's ten principles of economics in the conclusion.

Rational Decision-Making Using Mankiw's Ten Principles of Economics

According to Mankiw's first two principles, consumers are always faced with some type of quid pro quo equation when formulating purchase decisions, and this equation includes both apparent as well as potentially hidden costs. A consumer faced with the decision as to whether to invest in a discount card at a supermarket that provides future discounts on gasoline purchases also requires a cost-benefit analysis that is consistent with Mankiw's third principle: "A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost."

Therefore, consumers who do not drive much or only shop at this supermarket occasionally because they live across town may be far more reluctant to invest in a gasoline discount card by spending more than they planned if they are not geographically proximate compared to consumers who live in the neighborhood. It is reasonable to posit that most rational consumers would include this type of implicit cost in their cost-benefit analysis, even if only subconsciously.

In addition, there may be other factors involved in this decision-making process, though, that are not necessarily based on a rational thought process (e.g., an attractive and friendly female cashier may be able to persuade a young adolescent male to purchase a discount card even if he never intends to use it), but it is reasonable to suggest that most consumers will be far more likely to adopt a pragmatic approach to this type of cost-benefit analysis. In other cases, consumers may expect gasoline prices to remain sufficiently low or even drop lower in the foreseeable future to the extent that they do not need to invest in a discount card by spending more than they planned at the supermarket. In addition, consumers may simply stop using a gasoline discount card if they are able to buy gasoline elsewhere cheaper. This type of outcome is also consistent with Mankiw's fourth principle: "Behavior changes when costs or benefits change."

Supporting Examples and Evidence

There are some specific examples of consumers tying trade in one type of retail establishment with obtaining future discounts on gasoline. For example, in 2006, two supermarkets in Pittsburgh began offering gasoline discount cards for local service stations that were tied to grocery purchases (Leonard 3). In addition, a family-oriented restaurant in Pittsburgh followed suit and began piggybacking gasoline discount offers with their meal specials (Leonard 3). These marketing strategies were highly effective because they made consumers feel like they were receiving an exclusive deal. In this regard, Leonard advises that, "Gas purchases used to be more about brand loyalty. To some people, though, saving 5 cents on a gallon of gas feels better than finding a nickel on the sidewalk. There is nothing else that we buy that can carry a water-cooler conversation the next day" (3).

Likewise, throughout the 1960s and 1970s, budget-conscious American consumers were being lured into all types of retail establishments, but most especially grocery stores, service stations and department stores with various types of trading stamps. According to one historian, "They were immensely popular during the 60s and 70s. In fact, the S&H catalog was the largest publication in the U.S. and produced three times more stamps than the U.S. Post Office!" (Lowbrow 2). These marketing strategies were enormously effective and consumers would go far out of their way to trade with vendors that offered their particular brand of trading stamps (Bell 313). Indeed, according to Bell, in 1966, "S & H [Green Stamps] issued more than 32 million copies of its Ideabook containing 1,742 different items described in 132 pages" (313). During this period in American history, consumers would even spend more for the same merchandise they could obtain elsewhere cheaper if they could receive their brand of trading stamps in return (Bell 313).