It’s time for the wedding, but Haley and Dylan weren’t expecting this many people, nor were they expecting music. Alex’s boyfriend plays the bagpipes and he has “science” that proves bagpipes are necessary for a good wedding. His mom’s first marriage didn’t have any bagpipes and they got divorced. Her second wedding did have bagpipes and they’ve still been married after 6 months. Unfortunately, this is a weak correlation at best, and most definitely not causal.
See more: causation, correlation
Alex is unsure of what she should do with her life and she’s avoiding her mom. Jay picks up on the situation and tries to provide some guidance. Alex has been dreaming of becoming a scientist her whole life, but lately she’s dreamed up becoming a singer. She can’t have both and recognizes that to pick a path requires giving up the other option. We’ve seen this indecision with Alex when she was trying to decide whether to spend her summer interning or relaxing. Jay hints that he used to be a daredevil, but he gave it up to become an entrepreneur.
See more: counterfactual, entrepreneurism, opportunity cost, sunk cost, tradeoffs
Alex has been asked to babysit her cousin Lily. Lily wants to play with dolls during this time, but Alex tries to convince her instead to read a book that involves empowering women. Lily insists on playing with dolls, and the first doll she shows Alex is a wife who does not have a career, but shops.
See more: gender roles, nature vs. nurture, pre-market discrimination, societal discrimination, specialization
While Alex is freaking out about her junior year grades, Haley doesn’t need to study because her community college asks her to bring glue sticks. Education may serve as a signal of ability instead of actual skill building, which would be shown by entry requirements or competitiveness in the application process. Haley, on the other hand, may be completing drawn out tasks that don’t improve her productivity after completion. If Haley isn’t really learning skills at community college, but Phil and Claire are paying for her to go there to learn skills, are they really investing in Haley’s education?
See more: college, education, human capital, human capital investments, signaling, signals, skill building
Cam is trying to eat a bit healthier and concocts a soy-based bacon alternative called facon. Phil and Claire have to deal with an emergency, so Cam is in charge of breakfast. He insists that it his facon is indistinguishable from real bacon, but Mitch and Alex are able to tell a difference. Only in competitive markets do substitutes need to be indistinguishable from each other. If companies are operating in imperfect markets, firms can differentiate their product and still be considered a substitute.
Unfortunately for Luke, he’s allergic to soy.
See more: entrepreneurism, imperfect competition, markets, product differentiation, substitutes, tastes and preferences
Phil wants to ride his street strider, but his whole family thinks it is very uncool. Luke points out that he has friends on the street that might see, and Claire not so subtly threatens to leave him if he rides it suggesting she is not getting any joy from him enjoying his street strider and in fact it is harming their relationship. While Phil derives private benefits from the StreetStrider (like living healthier), he is also imposing social costs on his family. Given that his impact is relatively localized, the Coase Theorem would suggest that the Dunphy family can come to an agreement about whether Phil can keep his bike.
See more: Coase Theorem, externalities, external costs, negative externalities, private benefits, social costs
Claire believes Alex’s boyfriend is gay, but Alex doesn’t think that’s the case. She believes that since he invited her to prom and then they kissed, that it must mean he can’t be gay. Signaling is when one party has more information about a transaction than another, but displays some traits or “signals” to convince the other party of the true outcome.
See more: behavioral, signaling, signals
Claire’s favorite holiday is Halloween, but last year she may have went a little overboard to the point that the homeowners association forbid the Dunphey’s from doing particular things this Halloween. Claire’s goal is each Halloween is to produce a scary experience for trick-or-treaters visiting, but even Phil thinks she may have gone too far investing in professional grade makeup. He suggests that she could be twice as scary without wearing any makeup at all.
Another way to view this clip is through the impact of private benefits and social costs. Claire spends a lot of money each year on Halloween decorations, but her private benefits may not exceed the social costs imposed on neighbors (at least according to the HOA). The social costs of her decisions include someone wetting themselves and someone having a heart attack. While Claire may factor these into her investment decision, the HOA determined that the social costs outweigh the social benefits and has opted for a command-and-control approach to Halloween decorations at the Dunphy house.
See more: command and control, decreasing returns, diminishing marginal returns, government regulation, marginal utility, negative externalities, negative returns, role of government, utility
Alex is practicing her college interview for Princeton in the mirror when Haley comes in to style her hair. Princeton is an Ivy League school that is very prestigious and gets a lot of applications. Princeton does not know which applicants it should let in so it screens them. Screening is an action taken by an uninformed party in a situation characterized by adverse selection. There are many things that colleges do to screen applicants. They require high school transcripts, a certain GPA, test scores and they conduct an interview. When someone is interviewed, it’s an opportunity for them to send a signal. A signal is an action taken by an informed party in a situation characterized by adverse selection. Alex wants to signal to Princeton that she’s a good candidate for admission into the university. Haley shares her thoughts about the message that Alex is actually sending.
See more: adverse selection, asymmetric information, college, human capital, human capital investments, imperfect information, interviewing, signaling, signals
The Dunphy’s neighbor has a new boat that they leave in the driveway. Many of the family members are impacted by the visibility of the boat. This represents spillover effects and mean that an externality is present in the market for boats. Some family members see the boat as having a positive externality. Others see the boat as having a negative externality. As there is a relatively low number of people impacted by the boat (the Dunphy’s and other nearby neighbors), Coase theorem suggests that an efficient outcome can be negotiated. But will the Dunphy’s be able to get to it? Claire is immediately interested in finding regulations that restrict how residents can store large property like a boat. Many communities, especially home owner associations (HOAs), have rules pertaining to this situation. These rules are designed to lower the transaction costs associated with these externalities by providing a standardized process for dealing with conflicts between neighbors that settles disputes, thereby increasing the likelihood that an efficient outcome is attained. However, often these processes can end up creating problems themselves. What happens, for example, if the neighbors get together and decide that it’s OK to store the boat in a visible place? If they do and the enforcement agency requires a change, it can make things worse.
See more: Coase theorem, externalities, negative externalities, positive externalities, private benefits, private costs, property rights, regulation, social benefits, social costs, spillover effects, transaction costs
It’s Thanksgiving. For the first time, Claire is leaving the cooking to Phil…. or is she? She’s not. She made a fallback turkey, just in case Phil’s doesn’t work out. This demonstrates fallback position. Economists who study the family suggest that a person will stay in a relationship as long as the in-relationship utility is higher than the fallback position. While Claire isn’t considering leaving Phil for her fallback turkey, this clip can be used to discuss fallback positions. Claire has entered into a contract with Phil in allowing him to cook the family turkey. She will remain in that contract only as long as the benefit of eating Phil’s turkey is greater than the utility of eating her own turkey.
See more: fallback position, interdependent utility functions, marriage, risk, risk aversion, trust
Phil is trying to sell the house next door to a couple. In order to make the house as desirable as possible, he wants to put his family’s best foot forward. He wants the buyers to want to live beside his family. So, he has the kids outside gardening. This demonstrates adverse selection, signaling and the importance of spillover effects/positive externalities. Good, helpful neighbors are desirable and can increase a property’s value, especially if they take good care of their yard. Thus, there are positive externalities associated with landscaping. To discuss signaling and adverse selection, consider that someone is less likely to move if the neighbors are good than if they are bad. So, it’s entirely reasonable to consider the housing market as being characterized by adverse selection. Phil is doing all he can to signal that he and his family are good neighbors in order to get the couple to buy the house and to pay a high price for it. But are they good neighbors?
At the end of the scene, you’ll see the other possible new neighbors. It’s clear which family each of the Dunphys would prefer to live nextdoor.
See more: adverse selection, externalities, housing markets, negative externalities, positive externalities, preferences, private benefits, private costs, self interest, signaling, social benefits, social costs, spillover benefits, tradeoffs
Alex is graduating from high school soon so Phil, Claire and the kids are visiting Cal Tech. Claire thinks Cal Tech is the perfect place for Alex but she’ll find out soon that she and Alex have different preferences. College is one of the ways that we build human capital. As we learn more things, we become more productive and our labor is more valuable. Alex is already really bright and loves academics so college is a good fit to set her up for doing impressive things in the future.
Claire wants a great school that’s close. Alex wants a great school that’s far away. We also learn that Cal Tech has 5 Nobel Laureates on staff, suggesting that Cal Tech itself has a lot of human capital, making it a highly productive college.
Alex learns why Cal Tech might be a better choice for her than an East Coast school. What is more important: the quality of the program or proximity to home? Choices are tough and everything has a cost. Here’s Alex’s current dilemma: stay close to home and attend the best program in the country OR go to a college on the east coast with a weaker program.
See more: cost benefit analysis, incentives, human capital, nonpecuniary benefits, opportunity cost, preferences, self interest, school choice, signaling, skill building, tradeoffs, utility
Claire is going to meet an old friend from work, but her kids are surprised to find out that she once had a job. She describes why she chose to leave the workforce. The household production model allows for workers to determine if they would prefer to produce items for household consumption or work in the paid labor force to purchase those same item. Claire must have steep indifference curves given she quit the labor force to produce household items.
See more: comparative advantage, division of labor, household labor supply, household production labor force, labor force participation, labor supply, preferences, specialization, tradeoffs
When Claire and Phil cancel Christmas after finding what looks like a cigarette burn in the sofa, Alex suggests she and her siblings all confess so that their parents will reinstate Christmas and go easy on them for protecting their siblings. Unfortunately there is an incentive to cheat, but Luke isn’t smart enough and ends up confessing to something he didn’t do.
See more: cooperation, game theory, incentives, prisoner’s dilemma, sequential moves, simultaneous moves
The Dunphy’s call Phil’s parents in the sweaters they were given as gifts. The call goes awry when Claire sees what looks like a cigarette burn in the sofa. In her anger she calls the sweaters ugly while still on the phone with Phil’s dad. One of the issues with gift giving is that the receivers wouldn’t purchase the items they receive for the same price that the buyers paid for the item. On top of the inefficiency from an exchange point of view, there are psychic costs associated with acting like you enjoy the gift as well.
See more: altruism, gift giving, irrationality, preferences, rationality
Alex is hyper-aware of her future path into college and she knows playing an instrument will help her land in a prestigious college. Her parents had recommended she play the violin since it wasn’t as heavy, but Alex believes cellos are in demand in university orchestras, which should help her admission application. Part of the role of playing an instrument or sport (notice Alex’s lacrosse stick) is not necessarily that they are correlated with better students, but rather they serve as signal that students can maintain a rigorous academic load while also balancing extracurriculars.
See more: choices, college, demand, expectations, signaling, supply, tradeoffs
Alex has worked hard her entire life preparing for the perfect future, even learning how to play cello while playing lacrosse. She’s landed her dream internship, but it’s a very high stakes position and an extremely stressful environment.
While this decision troubles Alex, Phil steps into play a board game that Alex was just about to win. Alex has set Phil into a position to all but guarantee victory, but Phil decides to do something unexpected. While Phil uses this as a metaphor for Alex’s internship, it also represents the role of opportunity costs in our everyday decisions.
Every time we choose to do something, we are also choosing NOT to do something else. SO if Alex takes the internship, she’s giving up a relaxing summer that could be a much needed break for her. On the other hand, if she takes the summer offer, she may be missing out of an internship that could greatly influence her future career.
See more: choices, human capital, opportunity cost, preferences, risk aversion, scarcity, tradeoffs
Luke discovers that used women’s shoes command a higher price when he sells to people with very specific tastes. He and Alex join forces to supply goods to this niche market. By differentiating their product from just reselling shoes, the two can earn big profits.
See more: demand, monopolistic competition, outputs, product differentiation, profit, revenue, subjective value, supply, tastes and preferences
Economists often suggests that competition improves efficiency in markets and Jay seems to agree. He fosters competition within his family to help them achieve their goals. In an earlier scene, we learn that Jay withholds praise to encourage his family, but this year they have all seemingly surpassed his expectations. But are they really achieving those goals? The truth comes out in this clip. It turns out that they’re a family of cheaters and not a family of winners. Jay’s decision to incentivize them with praise has some stark unintended consequences.
See more: cheating, competition, ethics, incentives, moral hazard, motivation, self interest, unintended consequences
Phil has decided that decisions that can’t come to a resolution should be solved by flipping a coin. Phil has gotten one of those special coins for disputes between him and Claire. The two have been arguing for an hour about whether to be cremated and after being unable to land on a decision, Phil opts to flip the coin. As a final dispute, the two flip the coin to determine how they should spend their retirement account. Unfortunately for the kids, the coin decides that they spend it on a beach condo. Typical either-or-decision making involves a careful consideration of costs and benefits, but interdependent decision making may not be so easy.
See more: cost benefit analysis, decision making, either-or-decisions interdependent utility functions, tradeoffs
On their way to Phil’s father’s wedding, Phil asks his family to dress like 1920 gangsters, but it seems like they are the only guests there in costume. Phil is notorious for embarrassing his family and each member relates a time Phil did something that made him happy, but imposed social costs on others. It’s clear that Phil’s decision to focus on his private costs and benefits are not taking into the account the social cost he is imposing on his family members.
See more: externalities, negative externalities, private benefits, private costs, social costs
The Dunphys are having their house fumigated so they have to squeeze into a small hotel room. At first it seems like a fun opportunity to bond, but it turns out that there are a lot of comforts of home (like space) that the Dunphys really miss. Alex tries to practice her cello, Claire and Haley can’t get the wifi to work, the neighboring dogs bark all night, and a train runs through town around night time. Luke tries to set off a cologne bomb and ends up stinking up the whole room. Each member is doing some activity for their own personal gain, but end of imposing external costs on all of those around them.
See more: externalities, negative externalities, private benefits, private costs, social costs
The Dunphys normally have a lot of in-fighting, but this summer things have been going smoothly for 4/5ths of the family. Alex is away building houses for the less fortunate, but as soon as she returns everything takes a turn for the worse. Phil and Claire wonder is Alex is actually the root cause of all the tension. While she was away building houses, and even momentarily when she steps out, things start to look better. While these events may be correlated with Alex’s presence in the house, she certainly can’t be the cause of the tension, or could she?
Phil also makes a comment toward the end of the scene that they had so many great days in a row, that it was bound to end eventually. This mindset is popularly known as the gambler’s fallacy, which states that frequent events in one time period will happen less often in the next period. The alternative viewpoint is the hot hand fallacy, which assumes a pattern of events will continue at a higher rate given the occurrence of previous patterns.
See more: causation, correlation, hot hand fallacy, gamblers fallacy