FROMTHE UNDERCOVER ECONOMIST

TIM HARFORDPRESENTED BY –JAYAVIGNESH.J.T

Who pays for your coffee?

Behind a cup of coffee…

We can see coffee and snacks bar at all public transportation terminals.Their major customers are commuters who will not mind paying even double, if they could grab an instant but a decent quality coffee amid a peaceful ambience.Such commuters are exploited by entrepreneurs around the world and coffee kiosk’s location gets them more business than their coffee quality.

Some one is making Huge money

Economics professor Brian McManus says that mark-ups on coffee is around 150%. Then some one is making huge money, who?

This huge profit goes to the coffee shop owner only if he owns the land or else it is sucked off from him in the name of rents which will go to the landlord.

Landlords have upper hand because locations are important and there are only few attractive sites but large number of potential coffee bars

Owning a resource alone will not fetch huge sum but only the demand for the resource will decide the upper hand.

Economist David Richardo gives a simple story to explain how it works.

Many landlords with lands but only one farmer available. The bargaining power is with the farmer. When many farmers arrive, bargaining power shifts to the landlord. Thus the strength is from scarcity.

Owning a resource is alone not strength

Portable models

A farming example of 1817 can help us to analyse the coffee shop business of 2015. That is how study of economics works.

Economics is partly about modelling, about articulating basic principles and patterns that operate behind seemingly complex subjects like the rent farms or coffee bars.

David Richardo’s economic model is not applicable in many other situations.

High rents – basic analysis

Two main reasons for how people are convinced to pay excessively high rents. One is the business that the land can provide and the demand for the land. Second is the non availability of alternatives.

For example, People rent inside cities for the convenience of staying near workplace. But if commutes are improvised , it gives the alternatives such as living in suburb at low cost and travelling to workplace. This alternative will not be welcomed by landlords inside city

Two cases of expensiveness

Few things are expensive because they are naturally scarce.

Few things are expensive because of artificial means—legislation, regulation or foul play.

Richard’s model can help to differentiate between them.

A Comparison using Ricardo’s Model

A Field is compared to a company. Landlords receive rents and company owners earn

profits from their property.Meadowland (more efficient), scrubland (less

efficient) and the grassland (even more less efficient)

Likewise, a well organised company, a not so great company and a poorly organised company can be classified.

They yield profits according to their efficiency. John Kay calls it as “Sustainable Competitive advantage”

The inevitable competition

Every one wants to enjoy monopoly and will go to any extent to protect themselves from competition,

Few influence governments to favour them.Few sink as low as possible like using violence to

rip off the competitorsImmigrants whether skilled or unskilled lower the

wages of natives that rips them off.Despite all these, Competition helps to keep up

the quality

What do economists do?

Economists say how things work and what is likely to happen if you change them.

Economists study power, poverty, growth and development.

After knowing what underlies, they also become advocates and campaign to solve the crisis.

CONCLUSION

Billions of people could benefit from better economic policies. Millions are dying because of bad ones. Sometimes the logic of economics is so compelling that it’s impossible for economists not to take a stand.