Three Economic Terms to Help Explain My Coffee Addiction

Maybe you’re like me, and you have a coffee habit that involves paying someone way too much money to make you a cappuccino way too many times a week. Almost every day, you find yourself calculating how much money you would save each year if you just didn’t buy coffee, and then deciding over and over again that it’s worth it. (Not only did you just spent $4 on a coffee, but now you’ve wasted your mental energy too.) Maybe you’ve heard the financial wisdom that cutting out buying coffee is a good way to save (e.g. yourlatte factor). Here are three economic concepts to remember when putting yourself through this, or similar mental anguish over how you spend your money.

 

Opportunity Costs
• In economic terms: “The true cost of something is what you give up to get it. This includes not only the money spent in buying (or doing) the something, but also the economic benefits (utility) that you did without because you bought (or did) that particular something and thus can no longer buy (or do) something else.”
• In plain English: It’s what you give up in order to do something else.

So the cost of my cappuccino is not just the $4, but it’s also not putting that money towards something else. OK, a coffee a week and one less pair of shoes a year … I’ll take that trade-off. When I’m debating between two pairs of shoes—one for $80, and one for $120, I’ll take the $80 pair and 10 coffees, please.

 

Sunk Costs
• In economic terms: “When what is done cannot be undone. Sunk costs are costs that have been incurred and cannot be reversed, for example, spending on advertising or researching a product idea.”
• In plain English: costs that you’ve already paid for shouldn’t be factored into decisions of future spending.

All of the equipment that I’ve purchased to make coffee at home, that sad French press and coffee grinder that look longingly at my when I head out the door to the cafe, those are sunk costs. I might feel guilty about them collecting dust on my shelf, but I don’t need to factor in how much I paid for them when I debate whether or not to spend an additional $4 on a coffee this morning!

 

Diminishing Returns
• In economic terms: “The more you have, the smaller is the extra benefit you get from having even more; also known as diseconomies of scale.”
• In plain English: The more you have of something, the less valuable each additional one of that thing is.

In other words, the more coffee you buy, the less you enjoy each additional cup. OK, so maybe only one coffee a week (or at least only one per day).

So while it’s worth it to make sure I’m enjoying each cup, maybe giving up coffee won’t be where I save money. Let’s face it, there is a cost of giving up coffee, and for me, it is too much to bear. It brings me joy, and gives my productivity level a boost in the morning—those things have value. Maybe I’ll give up the mental calculations instead.

 

 

Steph Stern works in energy and environmental policy in the San Francisco Bay Area. She writes about careers and life choices at Small Answers (or follow on Twitter: @smallanswers). Economic definitions from The Economist.

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10 Comments / Post A Comment

Sloane (#675)

Costs aside, I’m always amazed that so many people can wait to have coffee in the morning. I pretty much have to have it in order to get dressed in the morning. So yeah, I save money and time and what not, but my real reason for making my own coffee is that I want it when I want it.

echolikebells (#3,272)

@Sloane Exactly! The very first thing I do in the morning is go downstairs and make my cup of coffee, and it follows me from room to room as I get ready. It is looking forward to that process that gets me out of bed in the first place, usually. I need it before anything else can happen.

garli (#4,150)

@Sloane This. Also I fully believe the coffee I brew at home is superior to ones I can buy at coffee shops.

honey cowl (#1,510)

@Sloane Yes of course I make coffee at home, and drink another cup on the way to work, but my addiction runs so deep I need another hit between 11am and 2pm. I spend too much on coffee and I know it, but my boyfriend does too, and we acknowledge that this is just part of how finances work in our relationship and we consider ourselves lucky to be partnered with a person who has similar priorities.

WayDownSouth (#3,431)

Coffee is addictive. People I work with drink at least two cups per day (and most people drink more). If we assume 2 cups a day @ $4/cup, that’s $40/week (assuming that we only buy coffee during the work days). Multiplying that by 52 weeks in the year is $2,452.

Therefore, the opportunity cost of paying others to make your coffee isn’t only an $80 shoe versus a $120 shoe. Once you look at the yearly cost instead of the weekly cost, the numbers become serious. (And that’s after tax as well.)

ellabella (#1,480)

@WayDownSouth From the article, it sounds like she’s having one $4 coffee a day, not two

WayDownSouth (#3,431)

@ellabella yes, perhaps. Her only reference to numbers is “too many times per week”. That’s why I based my calculations on two per day (which is what the people around me at work seem to drink). I also didn’t include drinking any hot coffees or iced coffees on the weekends.

My main issue was that she said the opportunity cost is one pair of shoes per year. Based on a yearly cost, however, we see that a rough cost is about $1,200 per year for one cup per workday, $2,400 for two, etc. That’s a lot of shoes.

stephstern (#4,149)

@WayDownSouth– You’re bringing up a good point, and exactly the mental calculations that I normally go through! The “pair of shoes” comparison was just for one coffee a week. I typically just buy coffee ac oouple times a week. I know that this type of expense can add up (to thousands per you as you point out!), but the mental back and forth can take a tool too. More than that, I think these are helpful economic concepts, not just for coffee, but all sorts of decisions.

Catface (#1,106)

There’s some definition creep going on here. My (near-daily, what’s it to you?) double Americano in my own cup clocks in around $2.25, and I know drip coffee is even less. Caffeine is wonderful and if anyone wants to drink, say, a pumpkin spice latte and has the $4 to spend on it, I am not going to begrudge him or her that. But this language is imprecise and obscures some of the real choices that people have made. “Coffee” does not cost $4!

(Sorry for the pedantry but I was an English major before I got into econ and this sort of thing drives me bananas. I would have no issue with “coffee drink.” I swear this is what lattes and such used to be called 15 or 20 years ago — am I high?)

s. dekker (#3,301)

I try to leave the $4-5 coffee drinks (lattes, fraps, etc) for once a week. During the weekdays I mostly buy the regular hot or iced coffee which comes up to $2/drink, and that doesn’t feel as much as spending $4 each day.

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