Monday, June 4, 2012

The Eleven Dollar Gallon of Milk

Would you buy an $11 gallon of generic milk at your local supermarket? I was surprised to find out that some people do the equivalent of this.

Interested in knowing why? To understand it, we need to take a short detour.

Scaling and Re-Scaling


Consider the following:

The U.S. debt is over $15,000,000,000,000.

If you are like most people, you have a difficult time grasping the concept of really large numbers. One way to better understand large numbers is to make them smaller through the use of relative comparisons and rescaling. 

The idea is simple. Given a number that is either too large or too small to comprehend, you re-scale it in terms of a number that is understandable.

Clear as mud? Let's give it a try:

$15 trillion in U.S. debt? How about expressing it as the share of each of the about 300 million citizens: $50,000 each. That's quite a bit of money.

$50,000 vs $250,000 in Annual Income


How does this relate to $11 milk? Consider that, according to the most recent census, the average household income is a little north of $50,000 per year.

Do you want to know what its like to make $250,000 a year while living in the same city as the average household? Follow the advice in a betterexplained.com article on developing a sense of scale:

$250,000 is 5 times more income than $50,000. A better way to think about this is that things cost 5 times less. In this case, that means everything is 20% of the cost of sticker (80% off). That means that a $25,000 car would cost $5,000. Wow.

This got me thinking. It works both ways. If a $50,000 household could understand what it was like to be a $250,000 household, then a $250,000 household could understand what it was like to be a $50,000 household: everything costs 5 times more. Ouch.

$15,000 vs $50,000 in Annual Income


Taking the comparison a bit further, what does it feel like when you make $50,000 as compared to minimum wage of $7.25 per hour? Here goes:

  • $7.25 per hour works out to about $15,000 per year if you assume 40 hours a week for 52 weeks a year. 
  • $50,000 is 3.33 times more money that $15,000.
  • Earning $50,000 per year is like paying 3.33 times more for everything when compared to a minimum wage worker.

 

The Eleven Dollar Gallon of Milk


This leads us to to cost of milk. The store brand milk where I live costs about $3.27 a gallon with tax.

A person making $50,000 per year would have to pay $3.27 * 3.33 = $10.89 per gallon to understand what it is like to make minimum wage. Ouch!

Closing Remarks


Although it may seem like it, I'm not making a political statement about fairness or income equality. Thinking about things in this way, though, was a surprising way for me to gain a different perspective. Furthermore, it makes me have a better sense of compassion for others - a central tenant of my religion.

Most importantly, this technique illustrates a useful tool you can employ to help understand all types of extreme numbers you confront, both small and large.

Happy (re)scaling!

No comments:

Post a Comment