2012 Writing Contest: Economics on TV?
First Place Essay
Economics in The Office
Television is everywhere from restaurants and stores to schools and houses. Like television, economics is an important part of daily life. It shows up everywhere including on our favorite TV shows. The Office is a classic example of how economics can affect a small business. The episode "New Boss" depicts many basic economic principles. It discusses implicit and explicit costs, exiting a market, and (almost) perfect competition.
Unhappy with his new co-manager, Michael Scott quits his job as Scranton branch manager for Dunder Mifflin Paper Company. He comes up with the idea of starting his own paper company, the Michael Scott Paper Company, and eventually gets two former employees to join him. Pam Beasley (receptionist) and former intern Ryan Howard decide to join Michael because, after considering their implicit and explicit costs, they think Michael's business has potential. However, after selling paper at exceptionally low rates and stealing customers from Dunder Mifflin, the Michael Scott Paper Company realizes that they will be out of money in less than a month. Their average revenue could not cover all of their total variable costs and they could not cover any of their total fixed costs. Without knowing about Michael's business problem, Dunder Mifflin offers to buy out the Michael Scott Paper Company, so they can get their customers back. Rather than accepting the money, Ryan, Pam, and Michael opt to get their jobs back with higher salaries because they prefer safe, stable jobs over one sum of money (the Michael Scott Paper Company).
According to William J. Baumol and Alan S. Blinder, economists and co-authors of Economics: Principles and Policy, implicit costs are opportunity costs, or what is given up when someone chooses one alternative over another (Baumol and Blinder). Implicit costs are shown in the episode, when Pam and Ryan are forced to consider the costs of both joining Michael's new business and of leaving their old jobs behind, along with spending time on the new business. Pam wants to get sales experience rather than staying a receptionist and she is able to accomplish this with the Michael Scott Paper Company. After some thought, they decide the benefits of joining the new company outweigh the costs.
Paper is a relatively uniform good with many buyers and sellers, so it could loosely be considered a perfectly competitive market. According to economists Dick Brunelle and Steven Reff, a perfectly competitive market must have price takers, many buyers and sellers, identical products, and profit maximizers. They also say a perfectly competitive market doesn’t exist in the modern world. However, a perfect competition graph would correctly depict the problem the Michael Scott Paper Company had when they charged such low prices, although the company was not a price taker, which means it would not be included in the perfectly competitive market. Also, because they charged such low prices, they were forced out of business, which could mean that the company should have been a price taker if it had wanted to earn a profit. Firms must produce where MR=MC, but when their average total costs exceed their price, firms will exit the market (Brunelle and Reff). This happened in The Office when the new company tried to charge such a low price they could not cover their costs, which resulted in economic loss. They were trying to maximize their profits by selling more than other companies were selling but, because they set such a low price, they really lost money. If Michael were smarter, which he obviously was not (for those who have never seen The Office), he would have considered learning some basic economics.
Although losing money and being forced to exit the market may have sounded bad for Michael, Pam, and Ryan, they were able to get better jobs at Dunder Mifflin with higher pay. Again, they realized that their implicit costs were greater than their explicit costs when running their own business, rather than working at their old jobs. After getting his job back, Michael still owned the small storage space he had used for the new company. His job at Dunder Mifflin allowed him to pay for the room he still owned after exiting the market, and he was able to use the space as a "café disco."
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