Luke is about to drop his history class because he has a major paper due that he hadn’t started yet. It turns out that the topic of this paper is the same topic his mother wrote when she was in college, but she was less than thrilled with her grade on the paper. She asks Luke to turn it in for her to see if she was cheated out of a grade.
In order to get the paper onto a flash drive, Claire had to go through some lengthy measures to convert the file from its original form decades earlier to a flash drive. We see the amount of technological change Claire has experienced in just her lifetime with the multiple computers linked together.
See more: creative destruction, Joseph Schumpeter, technological change, technology
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
Luke and Manny’s class is having a yard sale to benefit UNICEF. When Mitchel doesn’t want to donate Cam’s pants, Luke tries to re-frame the charity attempt to guilt his uncle into donating more money. Framing is one tactic to get people to do something they may not have done under the original design.
See more: altruism, behavioral, charity, framing, incentives, inequality, poverty
Luke and Manny’s class is having a yard sale to benefit UNICEF. Manny thinks the point is for them to learn about global altruism, while Luke thinks to point is to beat the other class. The teachers have used the incentive of a pizza party in order to encourage their classes to do their best in raising money. Jay is unhappy with this method and would prefer to write a check instead.
See more: altruism, charity, donations, incentives, self interest
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
Luke is finally tall enough to go on the rollercoasters and Disneyland, but Phil may be at the age where he can’t handle that pressure. The self-proclaimed “King of Rollercoasters” visibly diminishes as Luke seems to be unfazed by the G-force. While each ride adds a bit of additional joy to Phil’s overall utility, the marginal cost is clearly increasing as he continues to ride each ride. It’s not long before Phil’s marginal cost outweighs the marginal benefit of one more ride.
See more: decreasing returns, diminishing marginal returns, increasing marginal cost, marginal utility, marginal benefit, marginal cost, negative returns, utility, utility maximization
Kenneth, an old neighbor who idolized Phil, comes back to visit. He tells the Dunphy family that he dropped out of college and bounced around at small jobs until he started an investment company. Haley who is currently evaluating her college options realizes that if he had gone to college, he would have become successful 4 years later. Kenneth’s opportunity cost of college would have been very high making his decision to drop out a good one.
See more: acquisitions, college, education, entrepreneurism, human capital, human capital investments, mergers, opportunity cost, tradeoffs
When a classmate’s house burns down, the Pritchett family bands together to find things to donate to their cause. Manny and Luke are put in charge of a remote controlled helicopter that Manny has been coveting. Luke convinces Manny to fly it and they promptly lose the helicopter. Manny is scared of what Gloria will do when she finds out and threatens to walk to Canada if they do not find it. Luke replies that he hopes Manny likes taxes. Canada does tend to have higher tax rates than the United States, but there are also differences in the services provided by the two governments.
See more: budget balance, comparative systems, inequality, macro, role of government, taxation
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
Luke hires Haley to work for him at the golf club. Sometimes, her service is a little off putting but she is still his best worker and brings in good tips. She’s going through the process so that she can save up and move out of her parent’s home.
See more: incentives, labor market, savings, training
Luke thinks he’s ready for college and meets with a community college admissions officer. He asks all the important questions like “how hard is it?” and gets some tough but realistic answers. The admissions officers tells him that after years of hard work, he’ll graduate and be qualified for an entry level job and steadily get promoted until, around age 45, he can expect a 3 bedroom house. Luke compares his current situation with this potential future and decides that maybe college isn’t right for him. But that may not be the correct counterfactual for his decision. The items that he considers free (meals, cable, and laundry) are just being paid for by his parents.
See more: college, cost benefit analysis, counterfactual, human capital, human capital investments, psychic costs, skill building
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
Haley, Phil and Luke are participating in a psychology study. Luke has convinced Phil that they should push the big red button that says “DO NOT PUSH” but Haley stops them. She says one in a million college drop outs go on to become Steve Jobs. The other 99 thousand don’t (her math is a little off). She recently dropped out of college and is having a crisis. This demonstrates several economic concepts including the importance of human capital and time inconsistency. Human capital comes from going to college but Phil reminds her that there are other sources of human capital. Time inconsistency occurs when you regret a decision in the past.
See more: behavioral, counterfactual, education, entrepreneurism, human capital, sunk cost, time inconsistency
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
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
Luke was supposed to keep a journal all summer, but when school starts again in the Fall, he realizes he only did one day. At the start of the summer, Luke’s focus on the present imposed large negative externalities on him when it’s time to turn in the work later in the summer. People who highly value present consumption are said to have high discount rates because they don’t care about future outcomes as much. This hyperbolic discounting can result in some inconsistencies when Luke looks back and realizes how much trouble he’s about to be in.
See more: discounting, irrationality, negative externalities, present oriented, procrastination, time inconsistency
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
There are two concepts shown in this clip that can be used based on the portion of the course. First, Haley weighs two different career options and must consider the costs of each. Haley meets a woman who is interested in searching for a new husband who will die soon so that she can take their inheritance. The woman essentially offers to hire Haley as her personal assistant, but she’ll get to do leisurely activities. Luke tries to convince Haley to stick with the golf course because it provides a better future for her. Selecting one jobs means she can’t enjoy the benefits of the other.
The second concept covers the notion of labor-leisure tradeoffs. In the standard Income Leisure Tradeoff model, consumers are given a choice of determining their distribution of time based on the available number of hours in a day. Haley considers similar options here in terms of one job, with Luke, that requires a more work, but higher income while the other job provides more leisure activities. In this section, it helps students to realize that leisure has value similar to income and decisions makers are willing to give up income in exchange for leisure.
See more: employment, income leisure tradeoff, indifference curves, labor, leisure, nonpecuniary benefits, preferences, tradeoffs, wages
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
Luke is baby-sitting for Gloria. She expects him to care for her son in a responsible way. When Luke posts a selfie on social media, Gloria worries that her son might be in danger. This represents the principal-agent problem. Luke is the agent and Gloria is the principal. Is he acting in her best interest? Of course not! He’s shirking. To cover up his shirking, Luke tells Gloria that he has a series of photographs of her son in dangerous situation but they’re all fake. Now, he needs a series of photoshopped pictures but doesn’t use photoshop. So, he decides to only give Manny something that he wants if he photoshops Gloria’s younger son in to dangerous situations. This represents trade through barter. Luke has a pass that Manny wants. Manny has a skill that Luke needs. They trade because they have a double coincidence of wants.
See more: barter, double coincidence of wants, exchange, labor, moral hazard, network externalities, principle agent problem, social media, trade
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
Cam and Mitch went on vacation to celebrate their Honeymoon and brought back “gifts” to the family. Mitchell claims to have gotten sick because he wore socks on the beach, but his virus spread to the entire family. Each member goes through the pain they endured because Mitch didn’t quarantine himself. Only later in the episode do they find out that Mitch wasn’t even patient zero.
See more: externalities, gift giving, health care, negative externalities, private benefits, social costs, substitutes
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
Haley is in a bind and needs some money real fast. She goes to Luke, but he isn’t really in a position to give her any money because he’s decided to freeze his cash. He even remarks to Haley that he isn’t very liquid right now, but we’re not convinced he actually knows about liquidity.
See more: assets, frozen assets, liquidity, medium of exchange, money, store of value