Question

(Related to Solved Problem 16.1 on page 541) In 2016 , Walmart closed 150 stores in the United States and deeply discounted the merchandise in them. Some people bought the merchandise at these low prices and resold it on Amazon, eBay, and other sites. An article in the Wall Street Journal described one reseller who "sent three employees in a 26 -foot truck to the nearest closing Walmart, about 160 miles south. ... They hauled off \(\$ 35,000\) in merchandise, like Legos and Star Wars pajamas, which he said he expects to sell for as much as \(\$ 100,000\) on Amazon." a. Is the reseller making a \(\$ 65,000\) profit on these goods? Briefly explain. b. Is the reseller exploiting the people who buy these goods from him on Amazon? Briefly explain.

Short answer

a. It is not certain that the reseller is making a \(\$65000\) profit on these goods without considering possible indirect costs. b. Whether the reseller is exploiting buyers depends on an individual's point of view on the situation. Economically, the reseller is taking advantage of a market opportunity, but morally, some may consider this action as an exploitation of those who didn't have access to the original sale or those desperate to get the merchandise.

Step-by-step solution

Calculating Profit

Starting price is the amount the reseller spent on the merchandise, which is \(\$35,000\). The expected revenue from selling these goods is \(\$100,000\). However, to come to the profit, one has to subtract all the costs from the revenue. The obvious cost in this case is the starting price, but there may be other costs. Examples include costs for transportation (e.g. fuel cost for the 26-foot truck, wear and tear of the vehicle, possibly salaries for the employees that picked up and will sell the merchandise), costs related to selling the good (e.g. commission for Amazon), and potentially storage costs.

Analyzing Exploitation

The question whether the reseller is exploiting buyers is not simply an economic one, but one of morality and ethics. Economically, the reseller sees an opportunity in the market and tries to profit from it. Potential buyers do not have to purchase from the reseller if they consider the price too high. They can buy elsewhere or not at all. However, certain people may see buying 'in-demand' merchandise at low cost and reselling it at a much higher price as morally questionable. They may view it as exploiting those who did not have access to the original sale, or who are desperate to get the merchandise. It could also be seen as exploiting a situation where others may not have realized the merchandising opportunity.

Key concepts

Understanding Economic Profit

To demystify the calculation of profit, we start with revenue, which in this case is the amount the reseller expects to make from selling the merchandise, namely \(\$100,000\). To figure out the profit, however, we need to deduct all the associated costs from this revenue. These costs are not limited to the initial spending on the inventory; rather, they encompass every additional expense directly involved with the procurement and sale of the goods. This includes the cost of the transportation, storage, employee salaries, and sales platform fees.

Opportunity cost also comes into play. It represents the potential gain from an alternative decision the reseller could have made with their initial investment. For instance, if instead of buying Walmart's merchandise, the reseller could have invested the \(\$35,000\) in the stock market and gotten a 10% return, the opportunity cost would be \(\$3,500\), which should be considered when calculating the actual economic profit.

Therefore, while the reseller’s gross profit seems to be \(\$65,000\), the true economic profit is the revenue minus all explicit costs and the opportunity cost. It is this figure that provides an accurate measure of the profitability of the endeavor.

Analyzing Opportunity Cost

Opportunity cost is a fundamental concept in economics that involves considering the value of the next best alternative when making a decision. By choosing to engage in one activity, an individual inherently forgoes the opportunity to undertake another potentially beneficial activity.

For the reseller in question, the opportunity cost isn't purely a financial figure; it can encompass time, effort, and other resources that could have been allocated elsewhere. If he had used the truck for a different venture or if the employees were redirected to another project that potentially could yield more profit, these missed opportunities translate into opportunity costs.

It's essential for students to realize that opportunity cost is not recorded in the financial books but is critical for making informed and efficient economic decisions. By understanding and utilizing the concept of opportunity cost, businesses and individuals can better assess the relative profitability of their actions and allocate resources in a way that maximizes their overall gains.

Market Exploitation Ethics

Turning to the ethics of market exploitation, it requires delving into the morality of capitalizing on market opportunities. When a reseller takes advantage of a situation like Walmart's clearance sale to make a significant profit, it raises ethical questions.

The ethics of such a strategy are complex and subjective. One could argue that the reseller is simply operating within the bounds of a free market, providing goods to those willing to pay the asking price. Others might suggest that the reseller is exploiting both the initial seller's situation and the desperate needs or wants of the consumers.

When discussing market exploitation in an educational setting, it's crucial to acknowledge that while these actions may be legal and economically sound, ethical considerations must also be taken into account. The reseller's actions could be critiqued as taking undue advantage of the unequal information and opportunities between the buyers and sellers. Ultimately, the question of exploitation in the marketplace balances on one's personal ethics, the fairness perceived in the transaction, and the broader impact on the community involved.

As future economists, students should discern that profitability and ethics do not always align, and they should be prepared to evaluate economic decisions from multiple perspectives.