It’s been a really long time since I’ve written a Theories post. I’m super excited to share this interesting theory with you.
Imagine that you are going to buy new clothes (sale!). You pick up a nice dress/shirt with a lovely bright print (blue, orange and white is an amazing combination, by the way). You try it on, and notice that it completely hides all the stacked tyres near your stomach and your tandoori chicken shaped legs perfectly. Without thinking twice, you head over to the billing counter and pay with your Debit/Credit/PayTM.
You wear the dress for a day. Once you’re done wearing it, you wash it off (but you don’t wash away all the memories of the compliments you received: “You’ve lost weight!”). You let it dry in the sun, and resume whatever boring thing you do other than going to parties and enjoying yourself.
The next social occasion rolls by. You decide to wear your blue, orange and white dress/shirt(don’t worry, it’s a different set of people who will attend this party. No fashion faux pas committed). But when you remove the dress from the cupboard, you notice three things:
- The colour from the blue section of the dress has run onto the white and orange section of the dress.
- The hemming has gone for a toss.
- The dress has expanded itself to fit two people of your size.
What do you do now? Won’t you go and buy a new outfit to wear for the second party? Yes. (Assuming that you don’t have another outfit to wear / the other outfits have been damaged in similar ways.)
Will you learn from your mistake of buying the blue, orange and white dress? Yes. You will understand that colours fade or run. You will understand that certain materials stretch, and must be washed in a certain way only. But, and there’s a but. You will not learn all this in one go. It will take at least two -three cycles of shopping independently for you to realise that clothes are merely ephemeral. You can also add another variable of buying more than one outfit at a time. In which case, the learning curve will improve.
The key takeaway from the above example is: we make mistakes, and learn from them, to hopefully never repeat them in the future.
Now let me explain to you the benefit the economy gets from your learning curve. (It’s pretty easy. I’ll be surprised if you haven’t gleaned it yet.)
When you buy the blue, orange and white dress/shirt, its replacement, another replacement, and maybe one more replacement, you are SPENDING MONEY. (Assuming that there is no return policy in the store / ecommerce website). With every additional outfit you buy, you are increasing demand for the products sold by various businesses.
And now, every student of Economics can fill in the blanks: An increase in demand leads to an increase in production, which will further lead to increase in demand for factors of production by the Business sector, which will further lead to higher returns on investment by the Household sector, which means that the Household sector will start earning more money, and can hence spend more money, which will further lead to an increase in demand…
In layman terms, here is the explanation to the above paragraph. When customers start buying more of a particular product, the sellers / manufacturers are urged to sell / manufacture more of the particular product. They do so, because they know that an increase in production will be complemented with an increase in sales, and hence increase in money earned in sales revenue. But, to produce more of a particular product, more raw material, energy, manpower, transportation facilities are required. Therefore, the sellers/manufacturers approach people to work for their company / factory. They also hire services like transport services, marketing, advertising, etc. They also buy more raw materials, fuel, electricity, etc. Hence, the people who provide manpower, raw materals, energy and services start earning more money. Then, these people use the money they have earned to buy more goods than before. Where do these people buy more goods from? The sellers/manufacturers who produced more goods! And hence the cycle continues.
The above concept is called ‘Circular Flow of National Income’. It can be summarised in the following diagram I got from Wikipedia:
Note that the words I have highlighted in pink are represented in this diagram belong to Firms, and in green are Households.
And hence, making mistakes leads to an increase in demand, which is actually boosting the economy. So, the next time you make a wrong purchasing decision about clothes, makeup, food, anything, don’t beat yourself up about it. Remember, your mistake is actually a benefit to someone else.
To summarise this Theory, here is an Infographic I have created:
That’s it for today’s Theory post. Feel free to share any views, counter-views, anecdotes of shopping mistakes in the comments!