Undercover Economist What I Learned

¶ … Undercover Economist

What I learned from the Undercover Economist

The title of Tim Harford's work The Undercover Economist is somewhat misleading. Rather than a renegade view of the science of economics, the text instead purports to give a clear and rational explanation for the common, mundane yet seemingly irrational aspects of everyday economic life. It suggests that ordinary economic theory actually does have the explanation for such apparently inexplicable phenomena as the three-dollar lattes at Starbucks and the high price of poorly running used cars.

For example, take Chapter 2: "What Supermarkets Don't Want You to Know." Harford does not simply note that Starbucks is a chain store that has succeeded in marketing specialty coffee at high prices where consumers will pay extra for ambience and fancy names. Starbucks has a unique niche, that of price-sensitive customers who equate a product's quality with its price in a positive fashion. While the conventional law of supply and demand suggests that the greater the price, the less the demand, this is not always the case. Some consumers will buy in bulk when they see a discount, or even simply perceive a discount, while conversely other consumers will buy more because of a perception of higher quality given by a certain upscale brand name. Bargain stores are not always bargains, rather they draw bargain-seeking niche consumers by offering deep discounts on some goods, although not on all goods.

Although sometimes a higher price is reflective of higher input costs, as is the case with organic food, in other instances the price also reflects the target market of such commodities, which also tends to be more affluent in the case of organic produce. This idea demonstrates how even classical microeconomic theory has incorporated such real world factors as differences in consumer psychology, into its methodology. Consumer demand does not always increase with lower prices; it depends upon the target consumer market of the good.

Scarcity is another principle with multiple applications in the lives of everyday consumers. Everyone knows that if a good is scarce and desirable, a producer can charge more, and some goods are deliberately horded by producers so they can charge higher prices, like 'Tickle Me Elmo' or other hot toys during the holiday season, and diamonds and gold on the precious metals commodity markets. But how does this scarcity principle translate into conditions other than droughts and produce surpluses, or the pricing decisions of marketers in the general world economy? Take a local movie theater, where an artificially induced scarcity of other food products allows the movie theater to charge more for popcorn and soda, or a bar or a restaurant to charge more for wine.

In areas with high levels of tourist foot traffic, the principle of scarcity can also be induced, even though theoretically tourists could gravitate to other areas to eat. Because tourists don't know where to find good restaurants that are cheap, they tend to eat at the first place where they can find a table, near tourist attractions. Good restaurants don't locate to these areas, because even if they are able to charge high prices, they won't draw in the sort of local clientele that wishes to sample higher-end cuisine. Thus, while it is generally true that scarcity drives up the price of a good, a canny marketer can create scarcity, even when there really are other options.