What the Apple car says about the value of money

Posted Feb. 25, 2015 at 2:32 p.m. in Economics

I just wrote a post for Money talking about why the Apple car would be a much harder sell for most people than the iPhone was. The argument boils down to the fact that Apple makes money by selling products at a premium (high-margin), and consumers are a lot more willing to pay 50% more for a nicer cellphone, which might cost $200 instead of $130, than they are to pay 50% more for a nicer car, which might cost $30,000 instead of $20,000.

This is a pretty simple observation, but I often see people get tripped up assuming two dollar amounts are essentially the same as long as they represent the same percentage of something else. For example, I got a lot of hate mail when I suggested that a 10% tax on a $10,000 annual salary is much harder on a poor person than a 10% tax on $100,000 is to a rich person.

“It’s the same percentage!” they yelled. And they were right. But when you’re struggling to make ends meet, $1,000 more in income is much more important than $10,000 is when you already have the hierarchy of needs pretty much covered.

This also pops up in real estate, where the old axiom says your rent should cost 30% of your income. As a result, you’ll see a lot of coverage claiming somewhere like San Francisco, where let’s say rent costs 40% of the median income, is less affordable than somewhere like the Bronx where rent costs 35% of the median income (I’m making both of these numbers up).

But in reality, San Francisco is more affordable—or at least more livable—because the median income is so much higher. It’s the same as the above example in that it’s far easier for a median earner in SF making $100,000 to pay $40,000 in rent than it is for a median earner in the Bronx making $30,000 to pay $10,500 in housing bills.

Next time you see a percentage figure without the real dollar amount, think back to these examples. Proportions don’t always tell the whole story.