Lawn Mowing Economics

(iStockphoto)

As a teen, Max had a great business mowing lawns. He used his hand-pushed power mower to build up a large clientele in a radius of his family’s house. When his friend and neighbor Charlie entered the business, ending Max’s local monopoly, Max didn’t have to cut his price—Charlie just expanded the radius of the client area.

Max knew he had problems, however, when he saw Charlie drive out of his garage on a riding mower. Charlie could now do four times as many lawns/day as Max. Max started losing customers when Charlie cut prices, as he could afford to (because his average cost/lawn was lower than Max’s, and had a minimum with a higher output.) Not wanting to compete on price, and unable to get his parents to buy a riding mower, Max decided his opportunity cost was above his now lower lawn-mowing wage, and he quit the business to open a lemonade stand.

(HT to MF)


jonathan

Buried in there is a story about government. Not federal but state and local. Say Charlie is South Carolina and Max is New Jersey. Charlie's parents put up the cash, a subsidy, to buy the riding mower. Government "interferes" in markets not merely at the federal level. Let's say Max's parents are saving for college for 3 kids, while Charlie's family isn't saving for college for their 3 kids, so Charlie's family has more money available for subsidy. This means, just like with South Carolina, there is less investment in welfare and more money available to subsidize business.

This is pretty close to one of the biggest issues facing America: are we a country or a bunch of confederated states? If we're a bunch of confederated states, then we reward lower cost, lower welfare decisions because taking business from neighbors is good. The idea then becomes that by beating each other up, we are better competitors against others. If we're a country, then the question is why are we doing this to each other rather than working together to maximize our welfare while competing against outsiders?

I know the comparison isn't exact, but it's close enough.

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Brant

Interesting. How about this example for lawn mowing economics. As a teen in the early 80's I mowed my neighborhood lawns for around $20 dollars a pop. In 2011 my parents and these same neighbors pay around $25-$28 dollars for lawn crews of adult, immigrants to provide the same service. I'm not implying there is anything wrong with it. These crews provide a good, fast service to happy customers. I just find it interesting that the cost of having your lawn mowed has only increased around $5-8 dollars over the last 30 years. Also, I no longer see any teenagers mowing lawns.

Bill

How often do kid-run lemonade stands make money?

Caleb b

Max should have set up a tent on Charlie's front yard, potested and camped for weeks, demanding that Chalie end his greed.

Jeff

Brilliant!

Brian

Max should have sued.

North

But I thought there's always money in the banana stand... lemonade stands too ?

Doesn't the permit cost (business license, peddler's permit, food permit, etc), insurance (what if someone gets sick, chokes, is injured, or dies?), and related book-keeping for serving lemonade present entry barriers not faced by his lawn-mowing competitor?

Xian

What did Max do with all that money he made, prior to Charlie? why not 'invest' it in a riding mower, or check with a neighbor to rent theirs. Even better as a true capitalist, merged with Charlie and added trimming/edging to the list of services and both work together and create an empire of lawn maintenance that no other kid could complete with.

joe

The cheapest riding mower costs more than 4x the cheapest push mower.

Ben

They should have merged. You can't mow 100% of every lawn w/ a riding mower.

Bobby G

Once Max is out of the picture, Charlie can raise prices again until he reaches the monopoly profit maximization of MR = MC (which has a higher price than the perfect competition model of P=MC).

Of course, Max and his higher MC would only need to go out of business if Charlie controlled enough of the market. If there was enough residual demand left over, Max could potentially lap up some of the coverage that Charlie can't take on.

Basil White

The only self-made millionaire I know earned all of it mowing lawns.

Owen

Charlie should've found a cheaper Reel Mower and qadrupled his price, selling "Green and Quiet Mowing Services."

There is no doubt he would've found clients in the right neighborhood willing to pay the price.

RGJ

Max had tenure. Charlie should never have been given a union card.

Nick

This isn't realistic. Having mowed lawns for spending money in my teens, I speak from experience. You do not compete on cost (to a point, obviously). By hiring your neighbor's kid to mow your lawn, you get a guarantee (at least you think you do) that the job will be done well and on time because you know the parents. You cannot get this with a professional mowing service. Moreover, there's intense pressure to hire your neighbor's kid to mow the lawn if he/she asks. This pressure builds if other neighbors are already using the service. My brother and I mowed several lawns on our street, and I suspect that a competitor could not have undercut our prices enough to drive us out of business (leaving for college did that).

Taed

There's a wonderful, if disturbing, story in the collection of confessions _Real Americans Admit: The Worst Thing I've Ever Done_ illustrated by Ted Rall. There were 3 friends who did lawn mowing in a neighborhood and they had agreed on a certain price and each kid had a certain area. They completely enforced their monopolies on price and area and each enjoyed a good income. That is until a new kid moved in, undercutting their prices and infringing on their set territories. They first tried to reason with him and bring him into the "cartel" explaining that he'd make more money per lawn and have a guaranteed set of customers, but the new kid wouldn't go for it. Things escalated until they grabbed the kid and locked him in a mausoleum and left him there overnight (until their guilt got the better of them). The kid never told on them, quit mowing lawns, and was "not right in the head" after that.

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Matthew Brunelle

Love this post. I'm at the end of my semester and I'm in Microeconomics, so this was a create mapping for what I had just learned!

Carl Robertson

I feel bad for Max but that is business and there are even bigger problems in the real world. Good though that Max has a good strategy planned out - a contingency so as to survive in this world. You can't sulk all the time and blame yourself for what happened but instead, do something to bring yourself back up.

Lawn Love

Yes, ideally, Max should have saved us some money enough to upgrade his equipment already. But assuming one is really too expensive, then if he's innovative enough, his experience should be able to give him some advantage. Then again, if he's not that into lawn services, perhaps he's really meant to pursue a business that's more profitable given his smaller investment potential... ~Lawn Love, http://lawnlove.com