Lemonade Stand

(Or, How to Turn $37 Into Lemonade, And Then Into $50.)

Suppose you wanted to open a lemonade stand. Some internet searching reveals that the lemons, sugar, and water required to make lemonade add up to an overhead cost of about 37 cents per serving, in today's September 2020 dollars and price level. (Let's assume for simplicity's sake that you borrowed the table, the pitcher, the cups, etc.)

So, the cost to you is $0.37 per serving. You decide to sell your lemonade at a profit, so you choose a somewhat arbitrary price of $0.50, which earns you $0.13 per serving sold. 

Let us finally, and optimistically assume that you sell all the lemonade you make, and that you can make as much lemonade as you need to meet demand. You're clever enough to choose a good, legal location on a hot, sunny day, and so sell 100 servings per day whenever you decide to sell lemonade. You make a consistent profit of $13 per day. Not bad scratch for a little tike such as yourself.

Let's recap: Each day, you spend $37 at the grocery store for lemonade supplies, and you gain $50 from your customers. The difference between your cost and your revenue is $13, i.e. your profit.

Question: Where did this profit come from?

Yesterday, your customers were walking down the street with $50 in their collective pockets, and today, they are walking down the street with lemonade. You turned their $50 into lemonade; they turned your lemonade into $50.

Isn't it odd that you turned $37 into lemonade, but your customers turned $50 into lemonade? What happened? Did they over-pay?

No. While it's true that your customers could very well have gone to the grocery store and bought their own lemons and sugar, there are a few problems with doing so. First of all, it's inconvenient for them if they want lemonade now, relative to just buying a glass from you. Second, they'll likely end up with a surplus of lemons, sugar, lemonade, or all three; that is, they probably only want a glass of lemonade, not an entire lemonade stand. Third, when you went to the grocery store, you weren't thirsty; they were.

The revenue you make at your lemonade stand represents not only the cost of lemonade inputs, but also your customers' underlying sense of value, which is determined by convenience and thirst. 

When you turned $37 into lemonade, you weren't thirsty and you weren't inconvenienced. You ended up with a surplus of lemonade on purpose, so you could sell it. You also invested your surplus convenience and your surplus satiety into your lemonade stand.

At the end of the day, you turned $37 into lemonade, but then you turned convenience and thirst into $13 cash.

This process of turning other people's thirst into money is about as close to magic as the world gets, and it's one reason I've always been fascinated by economics.