Decision Making as Output and Bounded Rationality

-
  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
Post a Comment

Unlimited all the way- Diminishing Marginal Utility in Practice?

-


As one walks in to a five star hotel, we find ourselves inclined to try Buffet Meals for a fixed price. Andhra restaurants have become popular for offering unlimited meals. As we visit few amusement parks, we find they charge a fixed entrance fee and let us enjoy unlimited rides. Mobile service providers woo customers by offering unlimited SMS per day at a flat fee. Bangalore Metropolitan Transport Corporation (BMTC) lures us to try its buses with a day pass (unlimited rides for a flat fee for the calendar day). Further for ages we have had the concept of Bus passes for students and frequent users as also the Suburban rail passes in Mumbai and other cities in India.  Internet service providers offer unlimited browsing per month for a flat fee. Unlimited rides in public transports, enjoy unlimited SMS, telephone calls, internet usage or even unlimited cuisine sound attractive and are part and parcel of our daily economic life. Yet step back and wonder what logic prevails here. The answer here is law of diminishing marginal utility. We eat only to the extent of our stomach accommodating it. We ride in buses to extent of our need to commute between two places. Beyond a point eating more causes indigestion and riding in buses would tire us out or feel unwell commuting in the congested areas. Try and experience 10 rides in a Mumbai local on the tourist day pass!!. As we consume more, we experience a diminishing marginal utility forcing us to stop.  Unlimited All the way but the producers too are smart!!!!

Comments

Post a Comment

Popular posts from this blog

Decision Making as Output and Bounded Rationality

-
  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
Read more

The Economics Origins of BCG Matrix

-
  Economics has diversity of applications across streams. The applications range from management to business studies to national economies to politics to societies to history among others. Economics by its very nature has direct applications in the field of business theory. Many business theories, concepts, models, principles or whatever they might be have their origin in the domain of economics. The past posts have discussed such examples from the field of management theory that can be traced to economic roots. One such application that would be discussed in the current post would be the Boston Consulting Group (BCG) Matrix. Sometime back, there was a discussion on the application of BCG matrix in the context of sports popularity and innovation. The current post however would seek to locate BCG matrix in the context of economic theories and models.   As is well known to students of management, BCG matrix finds its application in product portfolio management. The products in the fi
Read more

A Note on Supply-Demand Dynamics

-
  Classical economics or rather its neo-classical variant posits economics revolving around the incentive mechanism. Economic agents are rational and hence their decisions revolve around the marginal cost-marginal benefit analysis. As discussed in the previous posts, economics is all about understanding actions of the agents and the implications of such actions. While economic agents might act in their self-interest, this need not align at all times with the self-interest of the group or the community they belong to. This misalignment might lead to the rise of externalities.   Yet, as agents act in their self-interest, it is important to understand the incentive mechanism at work. While people respond to incentives, they also respond to disincentives. There is definitely cost benefit analysis at work when the agents plan their action. This would be however contingent on the price they have to pay for the action. When someone over speeds or travels in the wrong lane or parks their v
Read more