Who pays for your coffee?

FROM
T H E U N D E R C OV E R E C O N O M I S T
TIM HARFORD
P R E S E N T E D BY J AYAV I G N E S H . J . T

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
kiosks 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 is alone not strength

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.

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 Richardos 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.

Richards model can help to differentiate between

them.

A Comparison using Ricardos 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 competitors
Immigrants 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
its impossible for economists not to take a stand.