Economics on Tips: Tips on Economics

Me-“When you give a server a tip, you’re not giving him or her advice. You’re rewarding them for giving you special attention, whether they did or not. To me, it makes more sense to tip a server, or any professional, before they’ve provided their services. If you tip well, or at least adequately, than the money is not going to waste—for you—because the server will take your early tip into consideration and give you the appropriate amount of service.”

Louis-“But our tipping is meant as a reward system, not the classical acronym: To Insure Prompt Service, as you are implying.”

Me-“Implying nothing, I’m saying straight up: It’s inefficient. Besides a false sense of moral righteousness, what’s the benefit to tipping well? And don’t say karma.”

Louis-“The server will remember you for next time.”

Me-“Exactly. But the server has scores of customers every night, seems like that’s a lot to keep track of even if a well-tipping customer shows up say…once every other week. However, this hypothetical customer only needs to remember one server. Much, much more doable; especially if the server responded notably well or not after a previous tip.”

Louis-“Would this mean people would tip less?”

Me-“I don’t think so, because then you get a societal, blind, silent auctioning for the limited number of servers. Every customer is then directly competing with every other customer. Also, these customers will feel like they are purchasing something--the server’s attention--with their tip. And people always pay more when they know more. I'm sure we'll come back to this.”

Louis-“Okay, but if the restaurants thought their servers would get more tips, couldn't they pay them even less? But I guess that could mean the food prices would go down."

Me-“Cool it Adam Smith. First thing: restaurants are only able to pay their employees less than minimum wage because they expect the tips. However, if a server gets no tips, for whatever reason, the restaurant legally has to compensate the server to the minimum wage salary. So at no point does a server make less money than anybody else working at minimum wage. Secondly, servers only have to work below minimum wage because other people would if they didn't. If nobody would work for $3/hour, nobody would have to. Thirdly, there is no reason to think food prices would go down if the restaurant could cut costs.”

Louis-“Sure there is. The restaurant can make the same profit on an individual item, they’ll lower their prices to reach out to more customers. It’s supply and demand.”

Me-“Okay, it's not exactly. It's the power of knowledge. Supply and demand is not the three-word answer to every economics discussion—especially when it’s more fun to use a few hundred. If society is functioning, as time goes on, people make more money and things cost more.”

Louis-“You’re talking about inflation.”

Me-“Winner. Now, every business is trying to maximize profits. No business can afford to just be content and sit on their hands. Everybody raises their prices until demand for said item or service starts to decrease. Think of it this way: if a $20 streak costs a restaurant $5, but then a cold snap kills a million cattle and $5 cost shoots up to $10, there is no inherent reason the $20 cost to the customer should raise to $25.”

Louis-“Sure there is. Less beef, or supply, means there’s more demand for what’s left.”

Me-“But that only works if the people know about the less supply so they can feel validated with their increased costs. However, if the number of people willing to pay an extra $5 decreases more than the profit gained of the remaining, extra $5-paying customers, the restaurant will not raise it’s prices. It would take the direct hit into the profit margin and keep the larger amount of customers. If people, without knowledge of a cattle-killing cold snap, would largely pay $25 for a steak—then you better believe the restaurant will charge $25 for a steak that still only costs them $5.”

Louis-“This is all very complicated.”

Me-“Of course. People spend their entire lives trying to figure it out. Just remember that people are not victims of economics, they are the driving force. If you want to know why anything costs any amount of money, it's because people will pay for it. Gas is $2.60 because people will pay for it. Gas will cost $3.50 because people will pay for it later. The toll both from Topeka to Lawrence cost 85 cents at exit 202 and a buck at exit 204 because…”

Louis-“People will pay it. But why does Taco Bell charge 99 cents for regular nachos, that is, cheese and chips but only 89 cents for their five-layer nachos?”

Me-“...”

Louis-“…”

Me-“Because Taco Bell is an a economic world between dreams and nightmares. An eatery between mysticism and reality. A place we can see, smell and hear but cannot comprehend. It is…the Twilight Zone.”