In the book, The Undercover Economist, author Tim Harford thoughtfully explains the practices and patterns of the economy. Harford first asks the reader to think about why big businesses, such as Starbucks, whose product is relatively simple, can profit so heavily. The main reason for this, states Harford, is the location of said businesses. By placing themselves in busy settings with commuters who are in a time crunch, it allows Starbucks to earn a considerable profit. Harford brings up an economic model published in 1817 by a British economist, David Ricardo, whose goal was to understand what had happened to Britain’s economy during the Napoleonic wars. Hartford uses an example from Ricardo’s book about a wild frontier which has plenty of fertile land available to grow crops, and only a few settlers. Because there are so few settlers, landlords cannot charge a price too high. However, when more and more aspiring farmers start coming to settle on the land, landlords can drive up the price. Once there is almost no land left, the price can skyrocket because settlers are willing to pay whatever they want to get a piece of land. This is an example of bargaining strength and scarcity. Hartford uses this example throughout the entire chapter when describing big businesses and the current economy because this model, although older, still applies today. Economists, according to Harford, see hidden historical patterns that are only obvious when focusing on underlying processes. Harford also addresses people being ripped off by big businesses, and the topic of of competition, two things that are very much present and somewhat inevitable in today’s economy.
Tim Harford explains thoroughly in his book, The Undercover Economist, that bargaining strength comes through scarcity. Bargaining shifts when relative scarcity shifts from one person to another. The example Harford uses is one from David Ricardo economics book, published in 1817. He explains that as more aspiring farmers come for meadowland, the amount of available meadowland decreases. Due to the fact that the meadowland is the only land that is extremely good for farming, aspiring farmers are willing to pay any price to have a current farmer evicted so they can take their land. But the current farmers want the land too, so they are willing to pay anything to stay on their land. This gives the bargaining power to the landlords because there are so many farmers available, and so little meadowland available. Harford transfers this idea back to current times where businesses want their stores to be in the best possible locations in order to make a high profit. Hartford uses the example of coffee shops. There are so many coffee shops available, and not enough profitable locations, that people are willing to pay a high price to get a location that will benefit them the most. This is how scarcity power works. In addition, many places have a high rent because the best land produces more when compared to the marginal land. The marginal land is the margin between being cultivated and not being cultivated, as Harford explains. Everything is always compared to the marginal land. There are many factors that can drive up prices of land. Harford states that if a product a company is selling is expensive, then the land that product is being sold on will also be expensive. Green belts drive up the prices of land because green belts are broad areas of land around a city that are illegal to develop property on. The rent determined in the city is set by the difference between how productive the city is, and how productive the marginal land is. If you make it illegal to live somewhere, then the price of the places you can live and work will rise because it is the only choice people have. Scarcity power is also related to the current job market. Harford explains that if the country is low on people who have certain skills, or degrees, then they will be paid rightly so for their scarcity value. This is why people with high degrees are paid good money for the degrees and skills they have. It provides you with scarcity power.
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