The Component Theory of Value

When I was in the fourth grade, during lunch in the elementary school cafeteria, I had a discussion with one of my friends about how much it would cost to build a Nintendo Gameboy from all of its component parts. We both somehow concluded that the parts necessary to build a Gameboy wouldn't cost more than $10 if purchased separately, yet Nintendo charged us $100 for the final product. What a rip!

It wasn't until I took economics in 11th grade that I realized the flaw in our reasoning. Even if all of the component parts only cost $10 (which, looking back, is quite doubtful), the component parts are not the only costs Nintendo must pay to produce and sell Gameboys, nor is the cost of production the only, nor even the most important factor to consider when determining what the market price should be.

Jeff Taylor catches a professional columnist writing for PCWorld fall for this same fallacy, proving once again that they don't teach basic economics in journalism school.

Then there is the general tone of the piece, which seems to suggest that Apple is somehow pulling a fast one on Shuffle buyers. How Much Should an IPod Shuffle Cost? How about exactly what people are willing to pay for one?

The commenters have some righteous fun at the author's expense. Some of my favorites:

Complainer: "This item costs way too much."
Me: "Did you pay for it?"
Complainer: "Yes."
Me: "Then explain to me again how it costs too much."

Oh right, Marty. Hey! I figure that article takes up $0.000002 worth of memory and costs less than $0.00001 to deliver. If you got paid so much as a buck to write it, Well that's just highway robbery fella!

Price out the "component parts" of a PCWorld magazine. Paper, ink, a dab of glue. Bet you aren't anywhere near the cover price.

You know, if you break it down to its component molecules, its like...an even bigger rip off, man.

If you break it down past molecules, it doesn't even exist. It's just a pattern or idea. That's an infinite profit percentage! I should buy Apple stock...they make money from nothing.

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I had a similar conversation

I had a similar conversation with a friend in fourth grade, but my conclusion was kind of nutty: I decided the value of the Gameboy was equal to the amount of labor put into it.

"Wait a minute," my friend said, "Wouldn't that mean you could just dig holes in your backyard, and they'd be worth like a lot of money?"

My eyes froze wide open. "My God, Brian, you're a genius. Meet me at my house after school--bring your shovel."

One eventually hears from a

One eventually hears from a customer who's bought a used or antiquarian book online (in an auction): "This book only cost $3.95 in 1942 [or even worse, "$1 in 1899"]; it says it right on the cover! How dare you charge me $10 or it?!"

My personal favorites are

My personal favorites are price-points arbitrarily based upon the consumers "ability" to pay and ones's "need" of the product or sevice. Both are exemplified in health-care and natural disaster aftermath.

How dare one profit at the "expense" of the poor and put-upon? I mean, after all, it's not like either of these can be covered by insurance.

Scott: I think you just

Scott:

I think you just proved that the labour/value school of economics (a favourite of Marxists everywhere) is fourth grade reasoning.