A look at hidden economic concepts in the hit ABC hit comedy series Modern Family.
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
Cam and Mitch are having a nice breakfast with Jay, but it turns out jay only invites them to breakfast because he has to meet a club minimum in order to keep his membership. We learn that Jay also buys people gifts from the club shop so that he can help his balance and even offers to get Cam and Mitch some spa services. This incentive mechanism by the club ensures that people aren’t just joining the club for the golf perks, which have relatively low profit margins.
See more: altruism, gift giving, incentives, self interest
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
Haley is in a bind and can’t decide who she should spend her life with. Should she stick with Arvin, the successful scientist who has his life together, or should she go with Dylan, her high school boyfriend who is full of fun? Every decision we make, whether we realize it’s economics or not, has tradeoffs. There’s only so much time in our lives and we must make decisions. One of the difficult parts of “matching” is finding the right rate to minimize conflict and maximizing our happiness. Happiness, in this case, is known as interdependent. Her happiness will eventually be a function of her own utility, but also her spouse’s utility.
See more: assortative mating, interdependent utility functions, matching, opportunity costs, tradeoffs
Cam’s dad, Merle, is fighting with Cam’s mom and they are considering a divorce. While there are utility gains from separating from partners, Merle believes he can do better than his current wife because he sees Jay and Gloria as role models. Gloria, however, paints a bleak picture of Merle’s future. Does Merle really have better options waiting out there or would he maximize his expected utility by staying with his current wife?
See more: cost benefit analysis, expectations, opportunity cost, tradeoffs, utility
The entire family is visiting Australia and has a hike planned for the day. On their way to the van, Cam and Mitch get a text from an old friend inviting them to join him on Hugh Jackman’s yacht that day. Cam and Mitch have to decide between time with their families or time with famous people. They don’t want to seem starstruck, but they also don’t want to be bitten by a snake in the name of family time.
See more: cost benefit analysis, opportunity cost, tradeoffs
It is career day at Luke’s school, and the teacher asks Claire to speak about her job as a stay at home mom. She points out that she actually has a lot of different jobs as a stay-at-home-mom. The household production model assumes that agents decide between working at paid work or working at home and producing things that they could have bought with income. Both yield some level of utility, but some partners will specialize in household production depending on the relative wages of the other partner.
One of the downsides of specializing in household labor is that people lose specific and general human capital associated with market work. While Claire would like to go back to work, it is hard to find a job after you have been out of the labor force for 15 years, mainly because everyone who didn’t drop out would have continued learning new skills. In labor economics, this is known as The Mommy Track.
See more: household labor supply, household production, human capital depreciation, job search, labor force, labor force participation, labor market, skills, tradeoffs, unemployment
Lily’s lost a tooth and it’s up to Cam to play the role of the tooth fairy. Perhaps it was late at night, or maybe too much wine, but the Tooth Fairy leaves Lily $100 for her first tooth. While both are in shock, Mitch points out that the going rate must be $5 tops and that the Tooth Fairy must have made a mistake. Delta Dental tracks tooth prices through the Tooth Fairy Poll, and the market rate in the United States is about $3.70.
See More: demand, equilibrium, expectations, market price, prices, supply
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
Phil has to decide whether to leave his own firm and start his own with two old co-workers, but he only has a limited amount of time to decide. He remembers that he is not good under pressure by recalling a time that he bought an alpaca because it was the last one and he panicked. Sometimes people may not make rational decisions because of bounded rationality, whereby they have to make a judgement in a hurry and don’t have time to fully weight all of the costs and benefits. Phil appears to fall victim to this fairly regularly, as evidenced by his decision to buy an alpaca once.
See more: bounded rationality, choices, cost benefit analysis, irrationality, rationality, tradeoffs
Phil finds gift certificates to a spa that he and Claire had won in a charity auction in a drawer, but they expire that day. He wants Claire to use them because otherwise their money just goes to charity, but Claire doesn’t know how she will find the time to be able to go. Phil is falling victim to the sunk cost fallacy, while Claire is thinking in terms of the additional costs and benefits of using the certificates before they expire.
See more: altruism, irrationality, opportunity cost, rationality, sunk cost, tradeoffs
It is Phil’s birthday and also the day the iPad is being released. Phil is willing to spend his birthday waiting in line to be sure he gets the new iPad, but Claire offers to do it for him. Instead of getting there early, she ends up falling asleep on the couch. When she finally gets to the store, they are all out, and Phil ends up wishing he had handled it himself.
See more: costs, demand, early adopters, gift giving, innovation, nonpecuniary benefits, preferences, tastes and preferences, technological change, technology
Pam’s ex-boyfriend is back in town and wants to get back together. Mitchel is all in favor of the reconciliation, but Cam is against it. Why is Mitchell so eager for her to move out? As long as Cam’s sister is in the apartment upstairs, they aren’t able to rent the apartment out and earn extra money. While Cam is trying to be generous for his family, Mitchell sees the missing dollar signs.
See more: altruism, cost of capital, implicit cost, opportunity cost, personal finance, rental income, tradeoffs
Cam and Mitchell own a duplex, which they would normally rent to someone so that they could earn a bit of extra income. This time around, Cam’s sister, Pam, needs a place to stay while pregnant, so Cam offers it to her rent free. This has put a bit of a strain on Cam and Mitch’s relationship because Cam’s sister has stayed longer than they planned and they need the money from the rental.
See more: cost of capital, implicit cost, interdependent utility functions, opportunity cost, personal finance, rental income, tradeoffs
After a fight about decision making between Phil and Claire regarding Phil’s opportunity to manager a magic shop early in their marriage, Claire surprises Phil by buying the magic shop he originally wanted. One of the things that jumps out to Claire initially is that the previous owner sold her the shop for a very low price, which she now wonders why he was willing to do that. The economic concept of asymmetric information relates to knowledge that one party has in a transaction that the other does not possess. The concept of information asymmetry was the basis for the 2001 Nobel Prize to George Akerlof, Michael Spence, and Joseph Stiglitz.
Second to the information asymmetry, this clip serves as a basis for the discussion on entrepreneurship and competition in markets. While some businesses are started to serve the needs of an area, others are started as passion projects. The ability to owners of businesses to buy and sell their property is a critical requirement of competitive markets.
See more: asymmetric information, competition, entrepreneurism, free entry
Claire and Phil go to a magic shop and talk business with the legendary Mister Ekshun. The magician laments that he can’t be at the shop everyday because he’s booking “road jobs” which we should infer have a higher payoff than the shop’s profits. Phil is curious about how a magic trick works, but they need to make sure Claire (a non-magic person) isn’t able to hear the trick. Phil learns that he had an opportunity to become a magician on a cruise ship earlier in life, but Claire had never told him about the call because of how busy their lives had been. One of the issues in determining the impact of an event is the lack of a good counterfactual to compare decisions to.
See more: counterfactual, licensing, occupational licenses, opportunity cost, physical capital, proprietary technological knowledge, scarcity, substitution effect, technological knowledge
Lily has the tough teacher but Cam and Mitch just learned of an opening in the “nice” teacher’s class. In this scene, the two approach Ms. Plank about transferring their daughter into Ms. Sparrow’s classroom. Education is one market where consumers have little choice. Some critics argue that this creates inefficiencies in the market while others argue that education consumers may not have enough information to make optimal decisions. Critics insist that giving consumers more choice would not necessarily lead to an improvement in efficiency. This sort of problem is discussed at many levels in education – from school choice to book choice. In this scene, it was clear that the Cam and Mitch were ill-informed of even their daughter’s preferences, but assume that Lily would have done better in the other teacher’s class despite not actually knowing Ms. Plank’s ability.
See more: education, human capital, human capital investments, information economics, market failure, preferences, school choice, signaling, skill building, textbook choice, tradeoffs
Jay has a great new invention that he believes will revolutionize the closet industry. He believes he’s created a sock dispenser that will rotate his socks so that he isn’t always wearing the same socks over and over. In competitive industries, product differentiation like this can lead to short term profits – especially for early adopters.
Unfortunately, Manny brings his friend over he recognizes the potential that this new sock dispenser could provide her uncle Earn, who is also in the closet industry. Earl is a major competitor (and former partner) of Jay and he now realizes that his proprietary idea may be stolen if he doesn’t act fast.
See more: competition, entrepreneurism, innovation, market power, monopolistic competition, patents, product differentiation, proprietary technological knowledge, trade names
Mitch and Cam needed a wedding videographer and Phil knows just the person to help. At an early stage in his life, Phil helped a friend with an infomercial he was filming and decided to reach out to the friend to pay him back as a wedding videographer. The concept of barter stems from the notion of double coincidence of wants. The videographer wanted someone to stand in for the infomercial and Phil wanted a favor down the line. Bartering is tough because the items at stake may not be able to be paid immediately or the exchange may be complicated. Traditionally, money is exchanged in the process, but Phil and his friend opted for a favor.
See more: barter, double coincidence of wants, exchange, services, trade
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
Dylan’s band is in need of a drummer, and Cam steps up to fulfill that role. Both Mitch and Haley show up to support their boyfriends, but something unexpected happens after the first song. Cam is in the groove and decides to perform an impromptu drum solo. Mitch originally found his solo impressive, but it ended up going on so long that he experienced diminishing marginal returns. In the beginning, each additional batch of time added to Mitch’s utility, but it wasn’t as impressive as the first unit of time, and eventually was more embarrassing than it needed to be.
See more: diminishing marginal returns, self interest, utility
Mitchell complains to Jay about Cam being too nice, and Jay complains to Mitchell about Gloria not liking his dog butler. In the beginning of the scene, the two complain about the actions of their partners and how it imposes a cost on them that they feel their partner is not considering. Jay loves his dog butler, but he also doesn’t want to upset his wife. Cam spends a lot of time helping people and animal, but Mitchell feels it is sometimes a burden.
Jay notes that they are both with people who are very different and that maybe that makes their relationships better. The concept of interdependent utility functions is that people maximize combined utility of a household/relationship even though that means they way not be maximizing their own individual utility functions.
See more: assortative mating, gains from trade, gains to marriage, interdependent utility functions, matching, preferences, utility
When the kids are back in school, it means that Phil and Claire go into production mode to make sure everyone is out of the house on time. In this one-on-one aside, Phil is under the impression that both he and Claire get up at 7 in the morning to start taking care of the kids. Claire informs him that she actually starts her day as a stay at home mom at 6 in the morning. Because Claire has a comparative advantage in getting the kids ready for school in the morning, Phil gets an extra hour of sleep. In the household model of labor supply, partners often divide the tasks based on specialization, not necessarily on equitable terms.
See more: comparative advantage, division of labor, household production, household labor supply, interdependent utility functions, labor supply, specialization
In an earlier scene, Mitchell bumps his daughters head on a doorframe, but then begins to worry that he may not be ready to have a child. Mitch sees how much Lily likes Cam and how good of a caretaker he is and begins to worry that he is a worse parent, but Cam reassures him that they are both great parents because they complement each other. Their decision to specialize in particular tasks allows them to complete more work together and both recognize they wouldn’t accomplish nearly as much if each had to go it alone.
See more: comparative advantage, complements, division of labor, household production, household labor supply, interdependent utility functions, labor supply, specialization
Mitchel bumps his daughter’s head on the doorframe, and he and Cam worry that something may be wrong with their daughter. They consider causal outcomes, like if he had hit her head she would cry (which she does), but then they worry about long term impacts of hitting her head. The two decide to call Claire for guidance.
Claire reassures them that everything is fine because her youngest son (Luke) was hit on the head a lot and he’s fine. Unfortunately, this correlation ends up worrying Mitchell more. While it may not necessarily be causal, the two worry that is and decide to take Lily to the hospital.
See more: causation, correlation, health care
Phil has a pair of slippers that Claire isn’t too fond of. While they bring private benefits to Phil in the form of comfort and easy jokes, it imposes a cost on Claire. Under the Coase Theorem, we’d suspect that Claire could pay Phil to stop wearing them or Phil could pay Claire to let him keep wearing them, but Claire has instead opted for a creative (and often illegal…) way to dispose of Phil’s possessions that she does not like.
See more: external costs, externalities, negative externalities, subjective value, tastes and preferences
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
Jay and Claire discover that Alex and Luke have started a business selling used shoes online. Jay praises Luke for taking the initiative to build a business from nothing. Claire praises Alex for making the business successful. An argument ensues that makes it clear that this is personal for Jay and Claire. Jay built a closet business but retired a few years ago and let Claire take over. Under Claire’s leadership, the company becomes even more successful and receives international acclaim. They fight over who deserves credit for the success and honors that the business currently has. The reality is that both are responsible. They both demonstrate entrepreneurialism and each played a different and equally important role in building the business. Entrepreneurs start and grow businesses. But can they admit this to each other?
See more: entrepreneurism, human capital, labor, management
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. At this moment in the episode, he appears that his motivation worked out and everyone has been successful, but later in the episode, we find out that there were some unintended consequences of his actions.
See more: competition, extrinsic rewards, incentives, intrinsic rewards, labor, motivation, perverse incentives, unintended consequences
Mitchell grew up on a farm wanting to be part of a lake family. He laments that anyone can visit the lake, but only wealthy families can sleep on a lake, implying that lake life if a luxury good. Now that he and Mitch have a bit more income, they get to experience the allure of sleeping on a boat.
Mitch, on the other hand, has discovered they own the same lamps that are on their boat and he isn’t too happy that they are “boat people.” Mitch likes the lamps a bit less after the discovery, but Cam likes them more. He sees the lamps as a display of wealth.
See more: demand, luxury goods, normal goods, positional good, subjective value, tastes and preferences
Phil goes into the wild to live like the famous Robinson Crusoe. In doing so, he provides a fantastic example of the factors of productivity. Productivity (Phil’s ability to survive in the wild) is determined by his human capital, technological knowledge, physical capital and natural resources. He has natural resources in abundance – fish, sticks, blueberries, honey and fresh water. He has some good technological knowledge because he knows how to build a fire. It’s not clear that he has the experience (human capital) to successfully build the fire. But, having lost his physical capital (fancy camping gear), it’s not clear whether or not he will be able to survive.
See more: factors of production, human capital, natural resources, physical capital, Robinson Crusoe, technological knowledge
Cam is desperate to win the football game and be a winner. He overhears the opposing team’s coach plans for the next play. Does he act on this insider information? Yes. Using insider information in buying and selling financial securities is illegal because it gives someone an unfair advantage. Similarly, many would consider Cam’s actions cheating. In fact, Cam feels really guilty about it but Mitch encourages him to keep up the facade because winning is also important to him. The decision making process involves weighing the costs (his morals) versus the benefits (winning).
See more: cost benefit analysis, ethics, insider trading, morals, self interest
Rainer proposes to Haley at dinner, but then the weather turns outside and he’s unsure if he made the right decision. In his back-and-forth about whether this was the right move, he brings up the fact that he’s already messed up one marriage. He notes that messing up one marriage is okay, but if you mess up two marriages then it sends a signal that he’s the problem in the relationship and it will lead to losing a potential sponsorship.
See more: causation, correlation, error, forecasting, signaling, statistics, Type II error
The Dolphins are on a winning streak and Cam keeps doing his pre-game superstitious activities in the belief that this is why his team keeps winning. Realizing he hasn’t been the most supportive spouse, Mitch decides to go to the game, but that’s against the weekly tradition and all of a sudden the team’s fortunes turn. It may be hard to convince Cam, but correlation doesn’t imply causation.
See more: causation, correlation, gamblers fallacy, sports
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
Cam and Mitch have been married 3 months, but it seems like their honeymoon will never end. Cam continues to give Mitchell flowers even though he clearly doesn’t enjoy them as much as he used to. He may have loved the first bouquet, but eventually he may start to hate them.
See more: diminishing marginal returns, gift giving, inefficiency, preferences, rationality, utility
Economics of Modern Family 