Student’s Corner

Ever since entering the world of eco-friendly products, the most common concern I’ve come across is why they cost so much more than the conventional counterparts. With the growing complexity of recycling and sustainability, this is an issue that we should face head on.

I will make my analysis as non-technical as possible, so please bear with me as I explain this simplified model to make a very important point.

In economics, there is the fundamental law of supply and demand and also a useful term called “economies of scale”. The price of a product is the equilibrium point of the quantity that suppliers are willing to make and the quantity buyers are willing to buy. If consumers are willing to buy more products, the producers are willing to make more of the desired products. Intuitively, you would think that increased demand results in an increase in price, but this is where economies of scale come into play.

Economies of scale is the idea that the more units of output the producer makes, the less the cost per output. This makes sense, considering that the firm has to invest in less capital to produce the good.

Let’s say that you want to start making notebooks. First you have to buy a notebook-making machine. Then, you have to buy all the materials required to make a notebook. The cost of that first notebook factors in the cost of the machine and materials, and is therefore very high. Now if we look at the cost of the second notebook, it’s significantly less than the first.

Why?

Because you already bought the machine and materials.

The cost of the second notebook is merely the additional cost you incur by making it. This is true for the 100^th notebook, the 1,000^th notebook, and so on, each with a decreasing price than its predecessor.

What does this have to do with supply and demand? Well, if the cost of production is decreasing the more you produce, the producer will charge the consumer less because they are passing on the savings of economies of scale. This is what we see in the production process of any product.

The reason why we have to raise so much awareness for sustainable living is because people aren’t already doing it themselves. This means that there is significantly lower demand for eco-friendly products in comparison to what is already out there. We have to remember that green product producers are businesses first and foremost so environmental consciousness comes secondary primary goal of profit making. This isn’t necessarily a negative thing, but if we want to reduce the price of green products, we have to increase the demand for it.

When there is low demand for eco-friendly products, there is low supply for them, and consequently, producers are unable to take advantage of huge economies of scale and thus, can’t pass along the savings to the consumer. The low demand discourages producers to invest in research to make the production process more efficient, to make the harvesting of recycled goods less costly, or to make their product less expensive out of fear of being unable to offset their costs with profits.

To put it simply: why do eco-friendly products cost so much more?

Because we don’t buy enough of it.

Written by Linda Shackles, Class of 2017