When I decided to get my PhD in economics, my mom wanted to be supportive. In order to do so, she first needed to figure out what economics was. So, she bought some fictional mystery novels. Yes, you read that right. Mystery novels.
These weren’t any ordinary mystery novels though. These were ECONOMIC mystery novels. Titles of the books included: “The Mystery of the Invisible Hand,” “Murder at the Margin,” “A Deadly Indifference,” and “The Fatal Equilibrium.” In each of the novels, an amateur detective (an econ professor) uses economic analysis to solve crimes. For example, in one of the crimes there is a situation with adverse selection and the killer makes the wrong decision on what to do (I don’t want to give it away), so the econ professor knows who did it! The author of the books is “Marshall Jevons” – a pin name used by the real economists William L. Breit and Kenneth G. Elzinga.
These books are a lot of fun – at least to an econ nerd like myself. I think it would be super enjoyable to teach a freshman seminar one day where the students read the book and then we discuss the econ principles in them.
Back to my mom. I love the way she was determined to learn what economics was, and she did it in her own special way. But, in reality, she used economics all the time! And especially in baking her famous Triple Chocolate Cakes.
Every year, my mom’s Christmas gift to all of our family, friends, and teachers was triple chocolate cake. Cake baking started in early December and went right through until Christmas Eve when the last cakes would be delivered.
We’re talking about 50-100 cakes within two or three weeks. Some cakes were large bundt cake, some loaves, and others mini loaves. Even so, it was a lot of cake. However, my mom figured out how to make them efficiently.
This recipe requires a lot of ingredients: cake mix, jello powder, mayonnaise, sour cream, water, vegetable oil, toasted almonds, eggs, almond liquor, almond extract, and chocolate chips. You probably keep eggs, vegetable oil, almond extract, and mayonnaise on hand, but (at least for me) the other ingredients require me to go to the store. Especially for something like the almond liquor, you only need a little bit of it for the cake, so it seems silly to buy a whole bottle, just for one. So, given that you need to buy so many specialized ingredients, it is actually helpful to be making a lot of cakes.
But, even with that, that’s not really where her efficiency came in. It came in with making the cakes. She found it was more efficient to make two to four cakes at one time than it was to just make one cake. Why? Well, the time cost of making the cake comes in the form of:
- getting all the ingredients out
- putting the ingredients in the mixer,
- mixing the batter,
- pouring the batter in the pans,
- baking the cakes,
- making the icing, and
- cleaning up.
Putting ingredients in the bowl, mixing, and pouring into baking pans is going to take you approximately the same amount of time, however many cakes you make. HOWEVER, if you are making – let’s say – four cakes. It takes the same amount of time to get the ingredients out for four cakes as it does for one. So, you save time there. Also, you are reusing the measuring cups for all four cakes, so you don’t have to clean them up each time. Plus, while she still made each cake batter individually, for the icing she simply multiplied the icing ingredients by 4 and mixed them together in a bowl. So, you’ve saved time by only making the icing once.
Now, why don’t you make 5, 6, 7, or even 8 cakes? Well at some point, the process doesn’t scale as well. Why? First, it is easy to start making mistakes the more cakes you make. Did you put the oil in? How about the almond extract? What about the eggs? Ugh, the eggs. I can’t tell you how many times I’ve made this where I have forgotten the eggs when I’m making multiple batches. I can tell something is wrong, but it’s not until I’ve put the batter in the pans that it hits me. The eggs!
Plus, after a few batches, you run out of oven space. Our kitchen growing up had two ovens (my mom was a kitchen designer… so a lot of thought was put into the kitchen). Once you run out of space in in the ovens to bake the cakes, you’re going to have to sit around for them to be done. You can squeeze multiple loaves or bundts into a single oven, but not at an unlimited rate.
What does this have to do with economics? Economies of scale! As you scale up your inputs, your average cost of production falls. In this case, the average time cost of making the cakes for four cakes is much lower than one cake. But, as mentioned above, there reaches a point where producing more does not decrease the average cost, and in fact it might start increasing it (you might have to throw out an entire cake if you bake it without the eggs). Then you have diseconomies of scale.
So what? Why do we care? Well as firms grow, they might experience economies of scale. Think Wal-Mart. They are huge. They can sell things at lower prices than smaller stores because of the economies of scale they experience.
In addition to economies and diseconomies of scale, my mom also knew something about diminishing marginal utility. The more someone has of something, the less they get out of each one. In the case of the Christmas cakes, my mom did not share the recipe with anyone. (Even the person who gave her the recipe but forgot about it.) This cake was (and is!) a special treat reserved for the holidays. So, by keeping the recipe to herself she limited the supply. There was no ability to have too much of this cake because it only came once a year.
She basically had a monopoly on this cake. Now, she didn’t charge anyone for the cake, but I bet if she did, her friends would have gladly paid a high price.
So, while my mom’s undergrad degree was in home economics, not economics, she knew more economics than she thought!
Triple Chocolate Cake
I am almost reluctant to share this recipe, but my family agrees that my mom would have been happy to have the recipe on my blog. So, here it is! A special, Christmas-time, treat.
1 box chocolate cake mix (I typically use Dunkin Hines, but whatever works)
3 Tbsp. Jello chocolate pudding mix
¾ cup sour cream
½ cup vegetable oil
½ cup water
½ cup toasted sliced almonds
¼ cup mayonnaise
3 Tbsp. almond liquor
1 tsp. almond extract
1 cup chocolate chips
Preheat oven to 350 degrees. Grease and dust bundt pan* with cocoa powder.
Mix all ingredients except chocolate chips in a mixer for approximately 2 minutes. Add in chocolate chips and gently mix.
Bake for 54 minutes.*
Cool 10 minutes before removing from pan.
Pour on glaze immediately.
1 cup powdered sugar
3 Tbsp. milk
1 tsp. almond extract
*If you want to make two large loaf pans, bake for 44 minutes.
*If you want to make 4 mini loaf pans, bake for 34 minutes.