To get started, here is a book review that I wrote for my Microeconomics class on The Undercover Economist by Tim Hartford:
Through my nineteen years of existence, I have intrinsically practiced and observed economic concepts. My parents have trained my brother and me by providing incentives, rather than the “do this, because I say so method.” My mom would drive us to Seven-Eleven to buy Slurpies on Fridays after school only if we had completed our homework all week. The brother who chose to take out the trash would receive an extra dollar to either spend at the snack bar the next day or to save it. In The Undercover Economist, Tim Harford explains basic economic concepts and encourages readers to understand and view the world through the eyes of an economist.
He first explains what determines pricing. It is not the sum of the composite costs, but the scarcity of the item being sold. Hartford provides the example of Starbucks charging seemingly outrageous prices for coffee in heavy trafficked areas, but I have noticed this example in my life in the market for Mexican food. My father has always been a Mexican food Connoiseur, training me to follow in his footsteps. We pride ourselves in finding great-tasting burritos, tacos, and enchiladas for relatively inexpensive prices. My favorite place to bring friends, cousins, uncles, grandmas, pastors, and strangers is a little “whole-in –the-wall” Mexican food place called El Farolito. This small little restaurant is located on Monument Boulevard in Concord, just 7 minutes from my house in Walnut Creek. My aunt refers to this street as “Little Tijuana” because of the abundance of Mexican markets, food, car-repair shops, and services. We can buy mouth-watering carne asada tacos for less than two dollars, gigantic burritos for four dollars, and receive free chips and salsa. It remains so inexpensive not because it is cheap to make (although it very well may be), but because there are so many competing restaurants offering nearly identical food in the surrounding area. Also, customers have to discover the subprime location, hidden next to the fire-station. For this same reason, two smaller tacos cost eight dollars at Zorro’s Mexican Restaurant in Pismo Beach. There are hardly any competing Mexican Restaurants in Pismo, and Zorro’s location is heavily trafficked.
On top of finding cheap Mexican food, my friends in high school would know me as the coupon kid. Almost everywhere we went, I would pull out some sort of coupon or discount, because I understood the concept of price targeting. Hartford explained in the book that businesses offer different prices for nearly identical products or offer student and senior discounts in order to scrape out from customers what they are individually willing to pay. I understood this, so I would not simply pay the eleven dollar price to see a movie; I would bring a pre-paid ticket from Costco, which cost me seven dollars and a little bit of thinking ahead. I would not pay outrageous prices for field level tickets to an Oakland A’s baseball game. However, I would go to the Wednesday games, where the tickets for upper deck seats cost two dollars and move down to the empty field-level seats for free.
Another point that Tim Hartford brought up is that pricing is always optional. People do not have to pay for something if they do not want to, meaning that people should never complain about a price being too high. Students often complain, “This is ridiculous. Why do I have to pay so much for a textbook?” My answer, “You don’t.” Students don’t “have to” go college. They don’t “have to” enroll in a certain class. More specifically, they do not “have to” purchase the assigned book for the class. They do not “have to” pay the price offered by the school bookstore. They always have an option. This brings to mind when I sold Psychology textbooks during Winter Quarter. I informed the class that I would be selling books for twenty dollars each. Over thirty people were willing to buy the books from me, because the price was four dollars cheaper than the bookstore. However, I still received emails and remarks from other students complaining, “You are ripping us off! We can buy this on amazon for five dollars.” Although I never verbalized this, I was thinking, “Then, buy it on Amazon.” Students assumed that I was scamming them, because I made a fifteen dollar profit on each book. I did not hold them at gun point or even pressure them to buy books. I politely made the offer. Thirty-four people were willing hand me a twenty-dollar bill in exchange for a textbook. I was more than happy to provide the service of ordering books and delivering them to students for a total five hundred ten dollar accounting profit.
After explaining what goes into pricing, Hartford explains that some things incur costs to more than just the buyer and the seller. These additional costs to other members of society are called externalities. When people smoke, they infringe upon others who do not enjoy inhaling second hand smoke. When people drive, they create pollution, inconveniences, and danger to other people. Rather than focusing on these externalities, I will focus on my high-school experiences. On summer nights, my friends and I, looking for something to do, would usually resort to water balloon throwing. We would go to the store, purchase a couple hundred water balloons for a couple of dollars, find a public water faucet to fill up the balloons, and throw the water balloons at innocent victims. Hours of fun only cost us a few dollars. Meanwhile, we incurred costs onto everyone else. The tax-payers would divide up the cost of our water. The victims of the attacks would have to deal with the inconvenience of being wet for the rest of the night as well as the humiliation, pain, and terror experienced from being hit with the balloons. My friends and I had fun, but we inflicted great negative externalities onto everyone else. That is why, throwing water balloons at innocent bystanders is considered assault and why I spent one of my nights sitting on the curb talking to police officers. My self-justification was that I was creating a positive externality by cooling people off on hot summer nights. Because I knew that the police officers certainly would not buy that latter argument, the conversation consisted of me saying “Yes Sir”, “I’m sorry”, and “No sir.”
After explaining perfect markets and externalities where all information is accounted for, Tim Hartford explains the problem with inside information or the market for lemons. He provides the example of how the used car market will fail if only sellers have complete information about their cars. The market will consist of only duds or lemons, because buyers will only be willing to pay half the value of a good car, given the fifty percent risks of purchasing a worthless car. This somewhat resembles my experience as a high school tutor. The market rate for credentialed, certified tutors is about sixty dollars per hour. Even though I might have been just as good as a tutor as those teachers and college graduates, I chose to enter the market at twenty dollars per hour. When I posted ads on craigslist, people had no way of knowing that I was not just some kid bragging about how smart I am. Their willingness to pay me twenty dollars compensated for the risk that I could be no good at tutoring. If they knew for sure that I was a good tutor, if they had complete information, they would be willing to pay me a much higher price. Over time, clients recognized my capabilities and the price gradually rose.
Most things in life take time to prove. Hartford explains that over time the better investors in the stock market will come out on top. Although it may seem like random ups-and-downs, good companies’ values will rise and good investors will make more money. Similarly, my friend Frankie and I experienced this in our high school A.P. Physics class. During the week, the teacher would leave us time in class to do homework. Frankie and I would work diligently on the homework to make sure we understood the concepts. Another group of students would sit around to talk about cars, golf, and girls. They would copy the homework from one person, and receive higher scores on the homework than us. When test day came, cheating was not easily available. Frankie and I would often earn scores of one hundred percent while the other group would receive lower grades and complain about how the test was too hard. This is a small illustration of Hartford’s example that time tells the truth.
He also brings up how countries and people can benefit from trade due to comparative advantage. On my high school football team, my coaches exercised this economics concept. My friend, Devon, was chosen to play guard on offense. Meanwhile, I was chosen to play tight end. Devon was much bigger, much faster, had greater football-catching abilities, and was thus a better tight-end. However, his skill level at offensive guard was also much better than mine. In comparison to himself, he was a much better guard than tight-end. I had the comparative advantage at tight-end and filled that position. Devon playing guard and me playing tight-end was what was best for the team.
Most people see economics as the study of the economy, generalizing it to the study of money. Although money is a measure of how people value things and experiences, it is not what makes the world go around. He explains that “There is much more to life than what gets measured in accounts. Even economists know that.” Tim Hartford realizes that every day decisions can be explained by economics. It is the study of how to best incentivize self-interested people to create fairness and efficiency. Also, self-interest often times creates beneficial outcomes for everyone. Every decision is an economic decision, whether the decision-maker realizes it or not. The Undercover Economists provides many valuable lessons about the world that every economist and unknowingly economically minded person should understand.
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