Opportunity Cost, Economic Profit, and Opening a Bakery

Overhead at a table of economists:

Susan: “They’re making a profit every month”

Mike: “Accounting or Economic profit?”

Table: Erupts in laughter.

I’m thinking about quitting my job as an economics professor and opening up a pie shop. Given my “expertise” in balancing a budget (what everyone thinks I learn when I get my PhD), I’ve estimated that I can make a $500 a month. How did I calculate that $500? Well I projected the number of pies I could sell in a month and subtracted the rent for my shop, the cost of hiring my employees, and all the equipment and ingredients I need. Awesome! I’m making profit of $500 a month or $6,000 a year.*

Now, let’s back up a minute. Should I do that? What else do we need to consider? What about my opportunity cost? Opportunity cost is one of the first terms one learns in their intro to economics class. It is the next best alternative to a decision. What would I be giving up if I quit my job and opened a bakery? Well… my salary as an economics professor!

To be clear, opportunity cost is NOT how much I would make in numerous different jobs. It is the cost of the next best alternative. In my current position, I gratefully make more than $6,000 a year (which would be less than minimum wage in a 40 hour/week job). Given that I need to pay for rent, clothes, a car, etc. that $6,000 profit I would earn opening a bakery doesn’t look as great.

In economics we call the $6,000 an accounting profit – revenue minus explicit costs.

Economic profit, on the other hand, is revenue minus explicit costs minus opportunity cost. To be making a positive economic profit, profit needs to be greater than the alternative, otherwise you should change businesses. Given that I make more than $6,000 a year now, my economic profit of opening a bakery would actually be negative. Should I open that bakery or not? Probably not.

Additionally, there is some risk in opening a bakery. Will I like it? Will it be the right decision? This uncertainty discounts my view of the potential benefits of starting that shop. That, given the high opportunity cost if I do open it, is probably going to keep me from opening a pie shop.

Now wait, you always hear stories of people quitting their full time, well-paying job to pursue their dream. And they seem ok. There are two factors. A) They could have money saved up to help them maintain a certain lifestyle. Or B) Their happiness (utility) from owning that bakery may be so high that it is worth it. Further, while their short-term projected earnings might be low, in the long-run it could be possible for them to build up enough following (sell enough pies, write a few cookbooks, etc.) that their long-run profit is higher.

So, who knows, maybe one day I’ll decide to open one. That day will be when the benefit I feel from owning a bakery is greater than being a college professor.

For now, I’ll stick with my day job.

For fun, here is another example. In fact, it is the first example I remember hearing as an undergraduate in my first economics class. Business school professors make more than many English professors with my same experience. Why is that? Doesn’t seem fair. They both teach students and do research. What differs? Opportunity cost. The skills that someone developed in graduate school to get a PhD and work at a business school would be highly valued on Wall Street. Therefore, universities have to pay business school more to work at a university than they do an English professor who doesn’t have the background and that opportunity cost. Wow. I had never considered that. This was one of the first lessons I learned that made me love economics. It makes perfect sense. Just as most of economics does. ** Just to be clear, I’m not discounting the importance of English professors. Arguably, they are just as important or MORE.

* I completely made up the numbers for my hypothetical bakery. I have no knowledge of how much you make with a bakery.

Cherry Pie

I’m going to share with you one of my favorite things to make. Pie. And, specifically today it is a cherry pie (although blueberry pie is a close second). The pie crust I present below is a combination butter/shortening crust. With similar results, I’ve made all shortening crusts when baking for someone who can’t have dairy and all butter crusts when I’m out of shortening. All-butter crusts are the rage right now. I took a pie crust class in Brooklyn once and the owner of the bakery told us that “Crisco was the product of capitalism.” Haha! I decided not to press her further by what she meant by that and whether she enjoyed earning a profit in her bakery.

People are scared to make pie crusts. They really aren’t hard, just work slowly and carefully. That being said, store bought pie crusts are pretty darn good and are much easier to work with, so don’t be ashamed to go that route.

Ingredients:

Crust

3 cups flour

3 Tbsp. sugar

1 tsp. salt

½ cup shortening

½ cup butter

½ cup ice water

Filling

3 to 4 cups sweet cherries, de-pitted

¾ cup sugar

3 Tbsp. cornstarch

1 tsp. cinnamon

1 tsp. lemon juice

Grating of the peel of one lemon

1 tsp. almond extract

Finishing

1 Tbsp. flour

1 tsp. sugar

1 egg

1 Tbsp. water

1 Tbsp. sugar (preferably raw) for finish

Directions:

Prepare crust

With a fork, stir together your flour, sugar, and salt. Here’s the tricky part: cut your cold butter and shortening into the flour mixture. What does that mean? Take two knives and cut back and forth as the butter chops up into the flour (see video below). You want to make sure there are pieces of butter that stay relatively large and flat. After the butter is cut up, I use my hands to flatten the pieces of butter into the flour. Again, keep the butter pretty big – this helps create the flakiness in the crust. You don’t want your butter to get too warm, so if you butter gets too soft, stick it in the freezer for 5-10 minutes to harden it up again.

Next, add ice water to the crust. I add a little at a time until the water is incorporated. I again use my hands for this.

Once you are done, separate the dough into two equal size balls. Stick your dough in the refrigerator for at least ½ an hour. If you’re going to keep it in there longer, you’ll want to cover it with plastic.

Prepare Filling

Cherry pie is a “labor of love” for sure, assuming you buy cherries with pits still in them. You can take a short-cut and buy frozen pitted cherries and speed things up. But, assuming you buy the fresh kind, de-pit all of your cherries. There are special cherry pitters that make things pretty easy. Otherwise, you can cut each cherry in half and pop out the pit (what I did here). Make sure you get all of the pits! You wouldn’t want to bite into a pit when eating your pie.

Combine the cherries, sugar, cinnamon, lemon juice, lemon zest, cornstarch, and ALMOND EXTRACT. The extract is optional, but it is absolutely delicious. Rather than cornstarch, you could use flour or tapioca flour in about the same proportions. I’m going to confess here that I’m not very exact with my pie filling ingredients. Don’t have a lemon? Almond extract? Skip it. Want it a little more or less sweet, adjust your sugar. It will be delicious regardless.

Assemble Pie and Bake

Once the dough is chilled, preheat your oven to 400 degrees and flour your counter top. Roll out one of the crusts and fit into your pie pan. If you want tome techniques on how to crimp the edge of your crust, check out this post by Food52.

Dust the bottom of your crust with a little flour and sugar (about 1 Tbsp. flour and 1 tsp. sugar). Fill your pie crust with the cherry mixture. Cut up 2 Tbsp. butter and place on top (if you are going vegan, you can skip this step).

Roll out your other crust – I find that doing a lattice is the easiest route to go. Or, you can have fun with it and use some cookie cutters to cut your crust into different shapes.

Next, if you choose, crack an egg into a bowl. Add a couple tablespoons of water and whip with a fork until egg is combined. Brush top of pie with egg wash. Sprinkle on some raw sugar, if you have. Regular sugar is fine too.

Place your pie in the oven. If it is overflowing, then you should put a cookie sheet on the rack below it to catch any excess liquid spilling when it cooks.

Bake in oven for 10 minutes, then lower temperature to 350. Bake for another 45 minutes. You’ll want to check after 30 minutes and cover the edges with foil to make sure the top of the pie doesn’t burn. When it is ready, you’ll see that the filling is bubbling a bit. This means that the cornstarch has activated, and the filling will come together when it is cooled.

Let cool as long as you can stand it. Hours if you want it to be completely ready. An hour or so if you don’t mind a liquidy pie.

A video on cutting butter and blending the pie crust.

Lattice