Thursday, October 06, 2005

MOTORCYCLES, MICROECONOMICS, MARGINAL UTILITY AND MARGINAL EFFICIENCY

MOTORCYCLES, MICROECONOMICS, MARGINAL UTILITY AND MARGINAL EFFICIENCY

The Author got you with motorcycles, right. Come on, admit it. No breathing adult would want to read about microeconomics, but many folks long for the open road and a wound-out bike.

Motorcycles are ubiquitous. They are cheap transportation in crowded international cities, workhorses in many rural areas in developing countries, and objects d’art and desire in the developed world. They range from the ultra-utilitarian scooter to the unapologetically obsolete American Cruiser. And for the sporting breed, today’s sportbikes produce more horsepower than small cars and run at the speed limit cubed.

So if we look at motorcycles in terms of their utility, almost any motorcycle will fill a basic transportation need. The Author could go to the classified ads and get a working motorcycle for a little as $300-$500. It probably wouldn’t look very nice nor go very fast. But it would go from point A to point B. And the Author is not ashamed to admit that riding even a lowly 125cc “beater” is fun.

But motorcycles are confounding[i] things. Many motorcycle owners are deeply devoted to one brand of bike, one type of riding (dirt, touring, slow group rides), or extreme performance. And many motorcycle owners lavish attention and spare parts in copious quantities on their bikes. So it can be safely said that many people own motorcycles for reasons beyond their base utility. Here is where the economics come in.

Economists are dudes and dudettes that work on the margins.[ii] Two important definitions are set out below:

Marginal utility
The change in total satisfaction as a result of consuming one additional unit of a specific good or service.

Marginal efficiency of capital
The percentage yield earned on an additional unit of capital. [iii]

If you have ever taken an economics course, the definition of marginal utility is often cast in terms of junk food. One Doublestuff Oreo is a nice treat. You eat another, and another. But then at some point, you will get less satisfaction out of eating the next Oreo. In economic terms, the marginal utility of the next Oreo will diminish and each additional one will have even less marginal utility. Finally, there will be little if any marginal utility in an additional Oreo. You have had enough cookies.

YOU DON'T NEED ANOTHER MOTORCYCLE.

One way to look at the marginal utility of motorcycles is to consider a person who owns several motorcycles. Some people like to have LOTS of bikes. A sportbike, cruiser, a dirt bike, a track bike, maybe an antique or classic. But let’s say that this person has a collection that contains several bikes for different rides. She owns three cruisers-a Harley-Davidson Soft Tail, a Victory, and a Yamaha V-Max. She has most of the cruiser world covered. She thought about picking up a Honda Valkyrie, but she recognized that she was not very excited at putting one more cruiser on the paddock. So she foregoes the purchase. In other words, the marginal utility of getting one more cruiser motorcycle is declining.

The Author is not a cruiser person, however. He likes sportbikes. He formerly owned a Ducati. And he recently put his money down for a Ducati 999, an expensive high-performance motorcycle. Ducati Superbikes like the 999 have been called the Ferraris of motorcycles. There are a handful of bikes that go even faster than 999s, but power-to-weight ratio, suspension characteristics, braking ability, and handling place them at the pinnacle of sportbikes. And they are drop-dead gorgeous motorcycles.

The Author’s 999 is a yellow monoposto. Monoposto is Italian for one seat. No place for a passenger. It is not comfortable and has no place to store anything. It does one thing. It goes very fast, stops very quickly, and corners well. There are many sportbikes that cost far less and are nearly as good. But getting from good to better to ultimate works on a declining curve of marginal efficiency of capital. Each additional dollar of components and engineering produces a correspondingly lower yield in terms of performance[iv]. And at some point, the marginal efficiency of capital spent to build a better bike will decline to almost nothing and finally to nothing. Not even Bill Gates could outspend you to go any faster.

These concepts, marginal utility, and marginal efficiency of capital, are common sense ideas that find expression and quantitative expression in the field of economics. And these concepts work in the world of motorcycles, chainsaws and power lawn mowers.

WE DON’T MOW NO STINKIN’ GRASS IN THE DESERT OF THE REAL!


[i] Almost Conundrumous things.
[ii] They never seem to talk about the big things, just the marginal things. Perhaps this why economists are on few A-lists.
[iii] These definitions come from Campbell R. Harvey's Hypertextual Finance Glossary. Mr. Harvey is an investment and finance professor at Duke University and hosts an excellent web site: http://www.duke.edu/~charvey/
[iv] Using marginal efficiency of capital in the context of marginal increases in race bike performance is a little unusual. Using marginal resource cost compared to performance costs would be a little more traditional. (Comparing each additional dollar spent to each performance gain). But this is an investment newsletter and the Author thinks in more in financial terms than production models and microeconomic. (If you call this thinking!)

But if I am the owner of the motorcycle company and I only race bikes to increase sales and earnings, then I want to know when my marginal returns on the money I spend on racing maximizes and then just begins to decline. That is where I will stop spending any more money on racing. This is called the profit maximization point. Most say that the profit maximization point is where marginal resource cost equals marginal revenue cost. But using the point where profits just start to decline is a way to actually test where the profit maximization point actually is

1 Comments:

At 12:20 PM , Blogger Puurrrkat said...

Nice read. One thing you might want to point out is that almost all people wreck their bikes at some point. A hospital, bike repair/replacement cost factor has to be considered when buying a bike for economic reasons...

 

Post a Comment

Subscribe to Post Comments [Atom]

<< Home