13 May

Currently, I’m reading a book called ‘the Undercover Economist’.
The author mentions that we live in the imperfect market, which mean in the world of untruth. But I can’t stop image if we live in the world of truth (in economic way).
Of course I didn’t consider all other factors.

Imagine this situation,

So, let’s by a cappuccino in the world of truth. Before frothing up and half-and-half for you, the barista looks you up and down and asks:

‘What’s the most you’re willing to pay for this coffee?’
You’d like to lie and pretend that you don’t really want it but the truth just slips out:
‘I’m in caffeine withdrawal. 4 dollars.’
With a smirk, the barista prepares to ring up the extortionate sum, but you have a few questions of your own:
‘How much did those coffee beans cost?’
‘How much did you pay for the plastic lid and the cup?’
‘How much did the electricity cost for the refrigeration, heating, and light in here?’ etc

Now it’s the barista turn. No matter how she tries to evade the questions or froth up the cost of cappuccino, she cannot tell a lie. It turns out that the cappuccino costs not 4 dollars, but less than one. The barista tries to haggle, but you have one more killer question:

‘Are any other place within 200 metres selling coffee like this?’
‘Yes…’, she moans, her head thudding to the counter in a gesture of abject defeat

Some of the results if we live in the world of truth:

Companies are making things the right way.
Any company that wastes resources, over-produces or uses the wrong technology will go out if business. Every product is produced in the most efficient way.

Companies are making the right things.
The price of a product equals to make it. The price also reflects the terms at which customers can trade off one priority against another. (Two cups of coffee cost the same as one bread roll; which one would you prefer?). The price is a direct line of communication from what products cost to what customers prefer, and back again.

Things are being made in the right proportions.
If too much coffee were being produced, manufactures would cut prices; and if too little, prices would rise. Either way, the situation would correct itself. On the competitive market, price equal cost; there is no incentive for anyone to produce less (giving up profitable sales) or to produce more (creating products that cost more than anyone is willing to pay). The competitive rule – price equals cost equals value to the customer – keep things efficient.

Things are going to the ‘right’ people.
The only people who but products are the people who are willing to pay the appropriate price.

So, if the right things are being made right in the right quantities and going to the people who value them most, there is no room for any gains in efficiency. To put it another way, you can’t get more efficient than a perfectly competitive market. And it all follows perfectly naturally from the truth contained in the price system: prices are true representations of cost to firms, and also true representations of value to customers.

Wouldn’t it be nice, if everyone telling the truth in the business industry?
This is why I’m not an economist, I’m too naïve.

I’m in Graz, working in my hotel room (calculating probabilities, analysing the benchmarks from the math test) and yet I’m thinking about this kind of things.
Damn, I shouldn’t bought this book…