Sunday, March 6, 2016

Teach Your Kid Economics With A Box Of Donuts

Today’s fantastic family finance article is:

A Marginal Donut

The best teachers know how to make abstract concepts concrete for their students — and sometimes even tasty.

The 6th grade teacher in today’s article is a wonderful example. She breathes life into the economic concept of marginal utility using a box of donuts. Here’s how you can do the same for your kids:

  • Sit your child down with a box of donuts.
  • Ask your child how excited she is to eat that first donut on a scale of 1 to 10. An eleven!
  • After that first donut. Poll your child on the excitement level for the next donut. Maybe a 9.
  • Repeat until you get to a 1 or a zero or maybe even a negative number. Time to grab the splat mat.

Your child now has a visceral understanding of diminishing marginal utility. The utility (in this case measured by level of enthusiasm) of each marginal unit (in this case each donut) decreases as each additional one is consumed.

Why is this concept useful in everyday life? It’s a way of thoughtfully allocating dollars to a set of purchases. Consider a warehouse store like Costco or Sam’s Club where the goal is to sell you a a supersized number of units at a discount. Your child now knows firsthand that the marginal utility of the units diminishes precipitously as she works her way to the bottom of the box. (Remember that last donut — yech!) Recalling that queasy feeling, perhaps she’ll opt for a smaller size and spend her remaining dollars on another item. That’s getting the most overall utility out of every dollar. Better yet, maybe she’ll save those extra dollars instead.

As the saying goes: “A bargain ain’t a bargain unless it’s something you need.”

Marginal utility: fancy term, simple concept. One box of donuts, and your kid will be on her way to acing that future AP exam in Econ or, more importantly, saving some money. Sweet!

P.S. Show your older kids this Khan Academy video for a more comprehensive, yet still accessible, treatment of marginal utility.

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