If firms are so efficient at reducing transaction and production costs, why don’t they make everything? Why do households still perform some tasks, such as cooking and cleaning? If a household’s opportunity cost of performing a task is below the market price, then the household usually performs that task. People with a lower opportunitycost of time do more for themselves. For example, janitors are more likely to mowtheir lawns than are physicians. Let’s look at some reasons for household production.
No Skills or Special Resources Are Required
Some activities require so few skills or special resources that householders find it cheaper to do the jobs themselves. Sweeping the kitchen floor requires only a broom and some time so it’s usually performed by household members. Sanding a wooden floor, however, involves special machinery and expertise, so this service is usually left to professionals. Similarly, although you wouldn’t hire someone to brush your teeth, dental work is not for amateurs. Households usually perform domestic chores that demand neither expertise nor special machinery.
Some activities require so few skills or special resources that householders find it cheaper to do the jobs themselves. Sweeping the kitchen floor requires only a broom and some time so it’s usually performed by household members. Sanding a wooden floor, however, involves special machinery and expertise, so this service is usually left to professionals. Similarly, although you wouldn’t hire someone to brush your teeth, dental work is not for amateurs. Households usually perform domestic chores that demand neither expertise nor special machinery.
Household Production Avoids Taxes
Suppose you are deciding whether to pay someone $3,000 to paint your house or do it yourself. If the income tax rate is onethird, you must earn $4,500 before taxes to have the $3,000 after taxes to pay for the job. And the painter who charges you $3,000 nets only $2,000 after paying $1,000 in taxes. Thus, you must earn $4,500 so that the painter can take home $2,000. If you paint the house yourself, no taxes are involved. The tax-free natureof do-it-yourself activity favors household production over market transactions.
Household Production Reduces Transaction Costs
Getting estimates, hiring a contractor, negotiating terms, and monitoring job performance all take time and require information. Doing the job yourself reduces these transaction costs. Household production also allows for more personal control over the final product than is usually available through the market. For example, some people prefer home cooking, because they can prepare home-cooked meals to individual tastes. Household production often grows during hard times. The economic recession of 2007–2009 prompted some families to shift from market purchases to household production to save money. For example, sales of hair clippers used for home haircutsincreased 10 percent in 2008 and 11 percent in 2009.
Technological Advances Increase Household Productivity
Technological breakthroughs are not confined to market production. Vacuum cleaners, washers and dryers, dishwashers, microwave ovens, and other modern appliances reduce the time and often the skill required to perform household tasks. Also, new technologies such as Blu-ray players, DVRs, HDTVs, broadband downloads, and computer games enhance home entertainment. The Information Revolution spawned by the microchip and the Internet has also enhanced the acquisition, analysis, and transmission of information. Indeed, microchip-based technologies have shifted some production from the firm back to the household. Because of technological change, more people can work from their homes. Go online to www.cengagebrain.com for a case study that discusses this development.
Suppose you are deciding whether to pay someone $3,000 to paint your house or do it yourself. If the income tax rate is onethird, you must earn $4,500 before taxes to have the $3,000 after taxes to pay for the job. And the painter who charges you $3,000 nets only $2,000 after paying $1,000 in taxes. Thus, you must earn $4,500 so that the painter can take home $2,000. If you paint the house yourself, no taxes are involved. The tax-free natureof do-it-yourself activity favors household production over market transactions.
Household Production Reduces Transaction Costs
Getting estimates, hiring a contractor, negotiating terms, and monitoring job performance all take time and require information. Doing the job yourself reduces these transaction costs. Household production also allows for more personal control over the final product than is usually available through the market. For example, some people prefer home cooking, because they can prepare home-cooked meals to individual tastes. Household production often grows during hard times. The economic recession of 2007–2009 prompted some families to shift from market purchases to household production to save money. For example, sales of hair clippers used for home haircutsincreased 10 percent in 2008 and 11 percent in 2009.
Technological Advances Increase Household Productivity
Technological breakthroughs are not confined to market production. Vacuum cleaners, washers and dryers, dishwashers, microwave ovens, and other modern appliances reduce the time and often the skill required to perform household tasks. Also, new technologies such as Blu-ray players, DVRs, HDTVs, broadband downloads, and computer games enhance home entertainment. The Information Revolution spawned by the microchip and the Internet has also enhanced the acquisition, analysis, and transmission of information. Indeed, microchip-based technologies have shifted some production from the firm back to the household. Because of technological change, more people can work from their homes. Go online to www.cengagebrain.com for a case study that discusses this development.
.
0 comments:
Post a Comment