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Economics of Replacing an Old Shirt With a New One Case Study


Introduction

Whereas continuous laundry reduced the value of the shirt, it should be done since that is the only way of ensuring that the value addition attached to the shirt is positive. However, the value addition during laundry may be sensible up to a certain period after which it becomes uneconomical to the owner. Although the owner might decide to continue taking the shirt to laundry after the viability period, the investment in terms of laundry fees might be more expensive than opting to buy another shirt. This paper will attempt to explain when it is necessary to buy a new one from an economic management point of view.

The Scenario

The shirt costs $120 in the market and it is taken to laundry every week at a cost of $6 per laundry session. After 20 weeks of laundry, the clients shall have spent $120 in the laundry services, which is similar to the cost of buying a new shirt. It is necessary to establish the economic value of buying another shirt after 20 weeks.

Applying economic principles to understand the scenario

Cost of buying the shirt = $120

Cost of taking the shirt to laundry on a weekly basis = $6

Cost of laundry after 20 weeks = $6 × 20 = $120

Therefore, the value of the shirt after 20 weeks will be similar to the cost of buying the shirt minus cost of maintaining the value of the shirt.

This translates to $120 – $120 = 0

Basic assumption

By the time laundry costs exceed or equal the cost of buying the shirt, the value of the shirt will be zero as a result of wear and tear.

Interpretation

From the above calculations, it is apparent that any further laundry services on the shirt after 20 weeks and continuous use would leave the customer at a worst off position since he will have to spend more to use a product whose value has depleted to zero. It would make more sense to buy a new shirt to maximize utility of the customer, considering the cost of maintaining the shirt for the after the next 20 weeks. The decision to buy a new shirt will only be valid when it is assumed that the cost of the new shirt is the same as the cost of the old shirt when new (Slavin 53).

Explanation and analysis

It would be uneconomical to continue using a shirt whose cost of maintenance surpasses its market value (McEachern 35). Besides, based on the law of diminishing marginal utility, the level of satisfaction that is derived from using the shirt reduces over time as illustrated in figure 1 below (Mankiw 12). Therefore, the client needs to buy a new shirt at the end of the 20th week to avoid losing on the true value of his economic decision in using this particular product. Specifically, the decision to buy the new shirt after the 20th week was informed by the need to make economically viable utility decision in the face of reviewing the opportunity cost of the first alternative (Arnold 34; Sexton 13). In this case, the alternative of buying a new shirt will ensure that the customer gets maximum value for his investment since an otherwise decision would mean that that customer has to spend more money on a product whose market value or usability is depleted beyond any economic sense (Colander 22).

Diminishing utility of the shirt
Fig. 1: Diminishing utility of the shirt

Works Cited

Arnold, Ronald. Economics, New York: Cengage learning, 2008. Print.

Colander, David. Macroeconomics, London: McGraw-Hill Education, 2012. Print.

Mankiw, Gregory. Principles of Economics, Volume 1. Alabama, Al: Cengage Learning, 2008. Print.

McEachern, William. Economics: A Contemporary Introduction. Alabama, Al: Cengage Learning, 2011. Print.

Sexton, Roberts. Exploring Economics. Alabama, Al: Cengage Learning, 2015. Print.

Slavin, Stephen. Macroeconomics, New York: Irwin, 2001. Print.

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Reference

IvyPanda. (2020, July 4). Economics of Replacing an Old Shirt With a New One. Retrieved from https://ivypanda.com/essays/economics-of-replacing-an-old-shirt-with-a-new-one/

Work Cited

"Economics of Replacing an Old Shirt With a New One." IvyPanda, 4 July 2020, ivypanda.com/essays/economics-of-replacing-an-old-shirt-with-a-new-one/.

1. IvyPanda. "Economics of Replacing an Old Shirt With a New One." July 4, 2020. https://ivypanda.com/essays/economics-of-replacing-an-old-shirt-with-a-new-one/.


Bibliography


IvyPanda. "Economics of Replacing an Old Shirt With a New One." July 4, 2020. https://ivypanda.com/essays/economics-of-replacing-an-old-shirt-with-a-new-one/.

References

IvyPanda. 2020. "Economics of Replacing an Old Shirt With a New One." July 4, 2020. https://ivypanda.com/essays/economics-of-replacing-an-old-shirt-with-a-new-one/.

References

IvyPanda. (2020) 'Economics of Replacing an Old Shirt With a New One'. 4 July.

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