The Undercover Economist

The chapter begins by introducing a Starbucks café at a metro station in Washington, DC, which is located in the path of busy commuters. Harford, acting as narrator, orders a cappuccino here for $2.55, noting that the “coffee in that cappuccino costs pennies” (8); still, customers are willing to pay an extreme markup for it. Through this example, he introduces the concept of scarcity, emphasizing that the customers’ choices don’t depend entirely on price. Customers’ other resources, including time, are limited by their circumstances and especially their location, which is why they don’t mind the inflated price. Furthermore, the landlord renting out this location to Starbucks can charge a high rate; if Starbucks refuses to pay, dozens of other coffee shops would swoop in to take over this prime location.

Harford further explores the concept of scarcity through the work of David Ricardo, an economist working at the beginning of the 1800s. Ricardo provides an example of a farmer seeking to rent meadowlands on which he can grow crops. There is plenty of land, so the landlords must compete with one another to provide the lowest rate since the farmer can choose any of their lots of meadowlands.