Relationship Between Relative Scarcity And Bargaining Power

1771 Words8 Pages
1. How does Harford explain the relationship between relative scarcity and bargaining power? Harford argues that whoever commands scarce resources holds bargaining power. Using an example from 19th century economist David Ricardo, he points out that landlords in a town with abundant unused land have little bargaining power over prospective tenants, because farmland is not scarce. The landlords gain bargaining power when farmers use up all the available farmland, however, because demand relative to supply has increased (relative scarcity). This model can be extended to retail locations for coffee shops: Since prime spots for selling coffee are scarce, landowners have bargaining power over potential tenants like Starbucks, and rents are…show more content…
A tenant would be unwilling to pay 13 additional bushels a day for meadowland because he or she could use the scrubland and only lose 12 bushels a day, therefore making the 13 bushels a day rent bump too high. On the other hand, competition between tenants will ensure that the price difference does not fall to 11 bushels a day. 3. How does Starbucks use price targeting (price discrimination)? Starbucks uses price targeting to identify customers willing to pay more by charging different prices for products that cost essentially the same to produce. Starbucks’ menu has products ranging from $2.20 to $3.40. This price difference stems not from a $1.20 difference in production cost, but rather a subtle way of encouraging customers to signal their willingness or ability to pay higher prices, and therefore allow Starbucks to increase its profits. 4. “[P]rices ‘tell the truth’ and reveal information.” Explain this statement using examples from chapter 3. In a perfect market, the price of a good or service reveals information about both the buyer and the seller. The buyer would never buy anything that costs more than it is worth to him or her, so the price reveals the value to the buyer. The seller would never sell anything for less than its cost of production, so the price reveals the value and cost of the good or service to the seller. 5) What are externalities? Cite two examples from chapter 4. Externalities are side effects of a person’s actions or
Get Access