Undercover Economist Flashcards

Introduction

The book explores how economists perceive the world, viewing everyday scenarios an intricate game of signals, negotiations, and contests for resources.
Economists analyze situations to determine who gets what, how, and why, and how companies exploit the system.
The book emphasizes the complex team effort required to produce even simple items like a cappuccino, highlighting the lack of central control in such systems.
Economists can explain complex systems, such as bookstores, and how companies exploit them.
Economics aims to understand people's interactions as individuals, partners, competitors, and members of economies.
The book aims to teach readers to think like an economist and become savvy consumers and voters.

Who Pays for Your Coffee?

Commuting patterns create opportunities for entrepreneurs, such as coffee shops located near transportation hubs.
The high price of coffee ( $2.55$ for a tall cappuccino at Starbucks) reflects the demand for convenience and prime locations.
Coffee markups can be around 150%, and companies make a substantial profit.
Starbucks' success is attributed to its prime locations, not necessarily the coffee quality or staff, and these locations are controlled by landlords who extract high rents.
Bargaining strength comes from scarcity, shifting power from landlords to settlers as meadows become scarce.
Rents on prime locations are determined by the difference in agricultural productivity between meadows and marginal land, and the value of that productivity.
Willingness to pay for convenient coffee sets the high rent, not the other way around; convenient coffee is price-blind.
Ricardo's model explains that high rents are not arbitrary but depend on the contrast between prime and marginal locations and the intensity of customer demand; strength comes from scarcity.
Economists model to articulate basic principles behind complex subjects.
Focusing on scarcity helps understand a universal economic system, but simplifications in economic models can mislead if not carefully applied.
High costs can result either from scarcity power or from artificial means such as greenbelts.
$Rent = Profit$ throughout Ricardo’s model.
Sustainable competitive advantage is an edge over the competition that produces profits year in and year out.
Companies with stiff competition will be less profitable than companies with incompetent rivals.
The newspapers often point to high corporate profits as a sign that the consumer is being screwed.
Trade unions, lobby groups, people studying for a professional qualification, and even national governments like resource "rents".
OPEC restricted oil production and prices increased, leading to alternative sources of oil, and forcing OPEC to accept a smaller share of the world oil market.
Drug dealers employ violence to create scarcity and deter competition, but success depends on organizational effectiveness.
Trade unions aim to prevent competition among workers.
Trade unions are designed partly to bargain collectively, but partly to block too much entry into the profession.
Skilled immigrants lower the wages of skilled natives, and unskilled immigrants lower the wages of unskilled natives.
Some economists claim that there is no difference between their analysis of coffee rents and their analysis of immigration.
Economists often step beyond their role as engineers of economic policy and become advocates.

What Supermarkets Don’t Want You to Know

Businesses with scarcity power cannot force us to pay unlimited prices for their products, but they can choose from a variety of strategies to make us pay more.
Rents will be high because customers will pay high prices for coffee in attractive locations.
They could cut prices and sell much more coffee or charging 60p to people who are not willing to pay more and £3 to people who are willing to pay a lot to enjoy the coffee and the view.
Fair trade coffee allowed Costa to find customers who are willing to pay a bit more if given a reason to do so.
Fair trade coffee allowed Costa to find customers who are willing to pay a bit more if given a reason to do so.
Socially concerned citizens tend to be less careful with their cash in coffee bars, while unconcerned citizens tend to keep their eyes on the price.
Any well-run business would seek to charge each customer the maximum price he’d be willing to pay—and they do.
Starbucks isn’t merely seeking to offer a variety of alternatives to customers. It’s also trying to give the customer every opportunity to signal that they’ve not been looking at the price.
It doesn’t cost much more to make a larger cup, to use a flavored syrup, or to add chocolate powder or a squirt of whipped cream.
There are three common strategies for finding customers who are cavalier about to price. Let’s cover two for now, and leave the best for last.
For a while, Costa hit upon an elegant strategy: Costa, like most other coffee bars these days, offers “Fair Trade” coffee; theirs comes from a leading fair trade brand called Cafédirect.
The first is what economists call “first degree price discrimination,” but we could call it the “unique target” strategy: to evaluate each customer as an individual and charge according to how much he or she is willing to pay.
Internet retailers can identify each customer by putting a tracing device called a “cookie” on her computer.
The “group target” strategy, which is to offer different prices to members of distinct groups. Students or locals get discounts.
When I raise the price, how much do my sales fall? And when I cut the price, how much do my sales rise? Economists tend to call this “own- price elasticity.” Personally, I think “price sensitivity” is a bit more descriptive.
The third way is the “self-incrimination strategy”, Costa Coffee and Starbucks both use when they persuade some of their customers into confessing that they are not sensitive to price.
Coffee bars are not alone. Supermarkets have turned price targeting into an art, developing a vast array of strategies toward that end.
Other supermarkets are more circumspect about their pricing policy. Going undercover once again, I made a comparison between the smallish Sainsbury’s supermarket on Tottenham Court Road in the heart of London’s West End, and the large store in Dalston, one of East London’s less prosperous neighborhoods.
The best price targeters pair their efforts to improve profits with apparently virtuous behavior, such as organic food.
Whenever I mention to people that I live near the Wholefoods supermarket in central WashingtonDC, they comment on how wonderful the store is.
The favored game at the moment has to be price-gouging the natural way, riding the bandwagon of organic food. or vote with your wallet by supporting any retailer—or direct supplier—who brings the price of organic and nonorganic food closer together.
An expensive shopping trip is the result of carelessly choosing products with a high markup, rather than wandering into a store with “bad value,” because price targeting accounts for much more of the difference between prices than any difference in value between one store and another.
Another common pricing strategy is sale pricing. Sales are an effective form of self-targeting.
They are torn between raising prices and losing customers, or lowering prices and losing margins.
They have to sell products that are at least slightly different from each other.
Are we being ripped off? It’s time for a reality check. Not true. People expect to be charged a lot for wine in restaurants and for popcorn and candy in movie theaters before they walk in the door.
Now we have a better answer: it’s likely to be a price-targeting strategy.
The first problem is that supposedly price-insensitive customers may not play the self-targeting game.
The most effective way for IBM to price-target their printers was to design and mass-produce a single printer, then sell it at two prices.
The second “leak” is a particularly difficult one for companies using a group-target strategy to plug: their products may leak from one group to another.
The risk is that the customers who are being offered a discount buy the product and then resell it at a profit to the customers who are being charged a higher price.
Confusingly, our moral intuitions seem to be sending us contradictory messages.
Perhaps the story is as simple as this: when it’s an important product like a treatment for HIV/AIDS, the most important thing is to get it to the poor; when it’s as trivial as a DVD, our irritation at being ripped off is the dominant emotion.
Imagine a hypothetical pharmaceutical company called PillCorp, which has developed a uniquely powerful new treatment for HIV/AIDS.
They knew that for a reduced price, locals are more likely to come regularly.
By charging wildly different prices for products that have largely the same cost, Starbucks is able to smoke out customers who are less sensitive about the price.

Perfect Markets and the “World of Truth”

Free markets force you to tell the truth. Prices are the truth, prices reveal information.
There’s a basic truth incorporated into any system of prices. That truth comes from the fact that stores and consumers do not have to buy or sell at a given price—they can always opt out.
In a free market, people don’t buy things that are worth less to them than the asking price. And people don’t sell things that are worth more to them than the asking price.
In a free market, all the buyers of coffee would prefer to have coffee than the money the coffee cost, which is shorthand for saying they prefer coffee to whatever else they might have spent ninety-two cents on.
Economists can measure and have measured some of these effects: when frosts hit Brazil, world coffee prices do indeed rise, Kenyan farmers do buy aluminum roofing, the price of roofing does rise, and the farmers do, in fact, time their investment so that they don’t pay too much.
Even if markets are not perfect, they can convey tremendously complex information. Governments—or any organizations—find it hard to respond to such complex information.
Because prices are optional, they reveal information.
Whenever anything changes somewhere in the economy, everything else will change to adjust.
Governments have difficulties responding to the complex problems of running an economy.
Government-provided schooling is another example of a nonmarket service that many of us use.
The more you reduce a price, the more it favors people who can afford them.
A perfectly competitive market is like a giant super computer network In other words, you can’t get more efficient than a perfectly competitive market. And it all follows perfectly naturally from the truth contained in the price system.
We seem to be facing two contradictory imperatives: avoid the needless waste that is inefficiency, but make sure that wealth is at least somewhat evenly spread.
Arrow proved that not only are all perfect markets efficient, all efficient outcomes can be achieved using competitive market, by adjusting the starting position. a program of appropriate lump-sum taxes and subsidies that puts everyone on equal footing.

Crosstown Traffic

The chapter examines economists’ approaches to market failures, using the example of crosstown traffic to explore solutions. Market failures are due to things such as a scarcity of power or missing information.
Driving causes air pollution, is an irritant, and makes accidents, causing bystanders to have more misery.
Economists call the side effect an “externality” because it lies outside the original decision, for instance, the decision to buy gasoline.
Drivers cause pollution. There must be some kind of way to determine an efficient way to take from them, for damaging our society.
In that case the question is whether people like 10 miles of traveling which harms others is worth what to me. This makes me have to have a conscience or good decision
The right thing to do will vary according to time, place, car, gas, and damage caused.
When there is no scarcity power involved, you can't raise prices that do not re-established with the current market situation.
You should be focusing on cases where the active person gains small benefits but causes large costs for others.
The economists’ defense is that however tough we agree to be, an externality charge is the most efficient way to be tough.
To the economist, the most important thing is the economy, instead of morality ,ethics ect.(things in which create fairness.
This gave a theater a lot of scarcity power, and if the manager is smart he’ll want to exploit that power to the full.
The problems with being an undercover economist: you have to start seeing “green belts” of one kind or another all over the place.
There isn’t an engineer for economic policy which is why it allows you to go by power, poverty, growth and development.
There are two different concepts of price at play here, and the distinction matters. The average price that a driver pays for a journey across a city. But the price that the driver pays for one extra trip across the city is low: the trip doesn’t burn much fuel and drivers are not charged for extra trips.
These two objectives conflict, since the value people put on lives, peace and comfort is going to vary. This can cause great confusion, and controversy on making an actual decisions.
I should get if