The Undercover Economist Free Book: A Brief Summary Guide

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[00:00:15] Today we will unlock the book The Undercover Economist, exposing why the rich are rich,

[00:00:20] the poor are poor, and why you can never buy a decent used car.

[00:00:25] We usually think that the construction of green belts in cities is a good thing.

[00:00:30] They can purify the air and protect the environment.

[00:00:34] However, economists believe that green belts also bring along some side effects.

[00:00:40] For example, green belts aggravate the scarcity of urban land, making rent and housing prices

[00:00:47] higher. This is how economists analyze everyday phenomena.

[00:00:52] The Undercover Economist is a book that analyzes everyday phenomena from an economist's point of

[00:00:58] view. In the book, the author discusses the economic principles behind many common phenomena.

[00:01:05] For example, if you buy a cup of coffee at Starbucks, how much is the total cost,

[00:01:11] how much is the profit, and who gets the lion's share of the profit?

[00:01:15] Or why do some tourist attractions charge full price tickets to tourists and half price tickets

[00:01:21] to locals? Moreover, how can we analyze and alleviate traffic congestion from an economic

[00:01:28] perspective? After listening to this bookie, you will discover the answers.

[00:01:34] The author of this book is Tim Harford from the UK, a famous undercover economist.

[00:01:40] In 2011, he started an economics column in the Financial Times.

[00:01:45] In this column, he uses economic thinking to explain everyday events.

[00:01:51] His articles are humorous, popular, and well composed. He wrote for the column for six years,

[00:01:58] and it became one of the most widely read columns in the Financial Times.

[00:02:03] Tim Harford is like an undercover detective probing the social and commercial kingdoms.

[00:02:08] He studies everyday phenomena from the perspective of costs and benefits.

[00:02:13] The Undercover Economist series written by Harford includes four books.

[00:02:18] The bookie for undercover economics 4 is also available in the app.

[00:02:24] Next, we will extract the key points from this book through the following three parts.

[00:02:29] Let's see what everyday phenomena Tim Harford the undercover economist has revealed.

[00:02:36] Part 1, Scarcity dominates the market.

[00:02:39] Part 2, Pricing strategies, Merchants means to make profits.

[00:02:44] Part 3, Externality and externality charge.

[00:02:49] Next, let's talk about part 1, Scarcity dominates the market.

[00:02:54] What is scarcity?

[00:02:57] When you want to buy a commodity in the market, there is either very little choice or only one choice.

[00:03:03] The dominant position of scarcity in the market is mainly reflected in the fact that scarcity determines the division of profits.

[00:03:11] That is to say whoever possesses scarce commodities takes away most of the profits.

[00:03:17] A set of market research data shows that it costs less than a dollar to make a latte,

[00:03:21] but Starbucks sells it for $2.55.

[00:03:26] Other coffee shops charge a lower price, around $2 a latte.

[00:03:31] So why is Starbucks coffee so expensive?

[00:03:35] Perhaps you think that Starbucks has a pleasant atmosphere,

[00:03:38] but then other coffee shops have their own unique appeal as well.

[00:03:42] Besides, many office workers will hurry back to the office after buying their Starbucks coffee instead of enjoying their drink in the comfortable setting.

[00:03:51] Perhaps you think it's because Starbucks has such an array of flavors for their coffee, such as chocolate, cream, etc.

[00:03:59] But actually, the chocolate and cream only add a little to the cost of a coffee.

[00:04:04] So, what's the reason then?

[00:04:07] If you look a little closer, you will find that Starbucks coffee shops are all located in unique positions.

[00:04:14] Starbucks are either placed at the exit of subway stations or in prosperous commercial streets.

[00:04:20] Also, it is generally the only coffee shop nearby.

[00:04:25] Every morning, trunks of commuters emerge from the subway.

[00:04:28] If they don't buy coffee at the subway exit, then they'll have to walk a fair distance to get one.

[00:04:35] Office workers will not waste a good 10 minutes to buy a cheaper coffee at another coffee shop simply because they are in a rush.

[00:04:42] If they want a coffee, they'll just have to buy it at Starbucks.

[00:04:47] Therefore, it is the scarcity of locations that causes the high price of Starbucks coffee.

[00:04:53] After the coffee is sold,

[00:04:55] how will the profit be divided?

[00:04:58] According to a study by economists, the profit of a cup of coffee can be as high as 150%.

[00:05:05] You might think that the owners of Starbucks will be pocketing all this money themselves, but in fact, this is not the case.

[00:05:13] Let's first consider a question.

[00:05:16] Since selling coffee at a subway exit or in a prosperous area is so profitable, why isn't everybody over?

[00:05:22] Opening a coffee shop next door to Starbucks?

[00:05:26] After all, running a coffee shop isn't complicated.

[00:05:30] The answer is very simple.

[00:05:32] The owner of Starbucks has signed an exclusivity agreement with the landlord at the expense of the profits.

[00:05:39] As for the landlords, they can rent the property space to many other coffee chains.

[00:05:44] However, they will find that no coffee shop owner is eager to pay a premium for a place.

[00:05:50] Next, to 10 other coffee shops, but some would be willing to sign an exclusivity agreement to avoid competition.

[00:05:57] As a result, the landlord will reap most of the benefits of the exclusivity agreement.

[00:06:03] So, of the money you pay for a coffee, the owner of the Starbucks takes a big chunk out of it to pay the rent.

[00:06:10] At this point, you can see that the landlord due to the scarcity of coffee shops in the area gets the largest share of the profit.

[00:06:19] It is not the owner of the Starbucks who makes the most money, but the landlord of the building.

[00:06:25] To put it simply, because the subway exit is a scarce location, consumers are paying for its scarcity.

[00:06:33] Scarcity then is the main factor in the sharing of profits.

[00:06:37] Whoever possesses the scarce resource gains more profit.

[00:06:41] However, Tim Halford reminds us that we should learn to tell the difference between the two.

[00:06:45] However, Tim Halford reminds us that we should learn to tell the difference between things that are highly profitable, because they are naturally scarce, and things that are highly profitable because of artificial means.

[00:06:57] So, what does that mean?

[00:07:00] Let's look at an example.

[00:07:03] There are three banks.

[00:07:06] Bank A has a great corporate culture, strong brand, the best specialized banking software, excellent employees, and high quality financial services.

[00:07:15] Bank B is a less trusted brand, and has an average corporate culture.

[00:07:21] The financial services provided by Bank B are not inadequate but not great either.

[00:07:26] Bank C is highly inefficient, and has a terrible reputation and rude tellers.

[00:07:32] In normal circumstances, Bank A can earn a large profit because it provides scarce services.

[00:07:39] As the services provided by Bank B are relatively poor, its services are not so scarce, and thus it earns a modest profit.

[00:07:48] The services provided by Bank C are the least scarce, so it barely makes ends meet.

[00:07:54] In this case, the high profits earned by Bank A and Bank B are the rewards they receive for offering scarce high value services.

[00:08:03] However, is there another situation where Bank A and Bank B can still reap high profits each year?

[00:08:09] Even when they don't have the scarce values mentioned above?

[00:08:13] This kind of situation also exists.

[00:08:16] Bank A and Bank B can use artificial means, such as lobbying their governments to ban new competitors like Bank C and even Bank D from entering the industry.

[00:08:26] As a result, consumers can only choose Bank A and Bank B if they want to do banking.

[00:08:31] Even if the services of these two banks are not necessarily of high quality, they are scarce, so they can attain high profits.

[00:08:39] This is simply because consumers have no other choice.

[00:08:43] Economists call those profits enjoyed by a firm without competitors' monopoly rents.

[00:08:49] In different parts of the world, in sensitive industries like banking, farming, and telecommunications, many governments grant monopoly licenses to established companies.

[00:08:56] In the field of urban planning, there are also examples of using artificial means to keep scarcity.

[00:09:02] One such example is London.

[00:09:05] In the 1930s, many green belts were built in London.

[00:09:09] The original intention of building the green belt was to preserve the environment.

[00:09:13] However, the green belts prevent the city's economic growth.

[00:09:17] The green belts are the only means to keep the economy alive.

[00:09:21] The green belt was to preserve the environment.

[00:09:24] However, the green belts prevent the city's expansion, reduce the land for urban residential buildings, and thus limit the number of people the city can accommodate.

[00:09:34] As a result, houses in London have become scarce, and house prices and rents are far higher than they would be otherwise.

[00:09:42] In Harford's view, some professionals also manage to maintain scarcity through artificial means.

[00:09:48] For example, lawyers, doctors, accountants, and other professionals set up high threshold qualification examinations to maintain their status as experts.

[00:10:00] These qualification examinations seem to protect the public from unqualified professionals, but it is also an attempt to maintain the scarcity and high incomes of professionals by crowding out low-cost substitutes.

[00:10:13] Alright, that's it for part one.

[00:10:16] Scarcity dominates the market.

[00:10:19] In the process of competing for profit, whoever possesses scarce commodities will gain the most profit.

[00:10:25] However, Harford reminds us to learn to tell the difference between natural scarcity and artificial scarcity.

[00:10:32] The former creates high profits by offering high-value goods or services, while the latter creates high profits by setting artificial barriers to deter competitors.

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