We often use economics subconsciously
as we go about our daily routine. Economics is about human actions and behaviour
and we engage in plenty every day from birth to death. These actions consistently
demonstrated over period of time reveal patterns that build up the theoretical
and conceptual foundations in economics. Quite often, many actions undertaken either
in personal, social, or professional capacities might occur without any
explicit linkage to economics but each of those actions perhaps reveal
something about economics and its idiosyncrasies in life.
Presented below are few examples in
tabular form. One column highlights the real life phenomenon what we observe,
while the second column builds up the theoretical linkage to economics.
Real Life Practice/ phenomenon
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Economics Linkage
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Free
E-mail services
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It might
be puzzling to find why Gmail offers free email services. Given the server
capacity they possess, any addition of extra user to their network commands a
near zero marginal cost. In fact even offering large space for mail storage
too has zero marginal cost given their investments in server and storage
space. These investments command fixed costs and thus at very large levels of
output command near zero average fixed costs, very high degree of economies
of scale. The email service providers generate money by offering personalised
services like email extensions linked to organization name etc. Those
desirous of personalised email ids will pay more and thus cross subsidize the
rest of the free-riders. Further firms like Google use the storage and server
space to offer numerous other offerings to monetize and leverage both scale
and scope
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Industrial
clusters
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One
often see the growth of industries in certain clusters. In Bangalore, all IT
industries are normally clustered around few spaces. They follow the concept
of economies of agglomeration. As the firms cluster together in city or
region, they gain from closer interaction. Vendor and customer relationships
will be easy to manage. For customers or vendors have an opportunity to interact
with their clients at one place thus facilitating cost savings. The firms benefit
from best practices and innovations which diffuse across the cluster fast. They
gain from access to talent pool thus reducing search costs. For those
prospective employees seeking jobs, it is much easier to approach different
firms at one place. Moreover, the housing facilities, educational facilities
comes up at the place resulting in spill overs. The financiers too would like
their search and enforcement costs to come down. Given the region with high preponderance
of technology geeks, it is highly probable of their random interaction at a
pub or a disc or on public transport in discussing innovations and rapid
diffusion and adoption of such innovations. Therefore agglomerating in close
proximity generates demand side cost saving spilling over to supply side cost
saving
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Ownership
of durables in slums
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Anecdotal
evidence from slums like Dharavi in Mumbai indicate a high degree of
ownership of consumer durables in slums. This is a puzzle given the land
titles are hazy and slums might be demolished any time. Moreover there are possibilities
of forced eviction. The lack of titles itself answers this puzzle in part. Given
the lack of clear ownership, the slum residents have little incentive to
build or develop or improve their housing conditions. They are reconciled
whether one wishes or not to the ambiguities in ownership and dangers of
demolition. So they find no point in spending money of refurbishing immoveable
assets. Given the expenditure function, and the principle of utility
maximization, the law of equi marginal utility dictates allotment of income
in such a way that ratio of marginal utility per good to the last rupee spent
on that good is equal across all goods in the basket. In the conditions, the marginal
utility of durables increases relative to the price and thus expenditure is
shifted towards ownership of durables. The shift continues to happen till
such time MU/P equals across all goods. If there were to be clear titles of
ownership, the MU/P changes with respect to goods in the basket and residents
will shift towards refurbishment and development of their houses.
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Duty
free shopping festivals
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People
enjoy duty free shopping. One tends to maximize utility given the
constraints. Once the price reduces, there is tendency for maximising behaviour.
People love incentives. The current sources of supply mean people have to
spend more for their requirements of luxury goods. Given the associated expenditure
functions and law of equi-marginal utility, the spending is allocated for
essential goods. In duty shopping festivals, the attractiveness of being duty
free encourages consumers to buy more. The incentive is robust enough and
price fall is sufficient enough to create an upward substitution effect
making a movement towards a higher indifference curve.
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Multiple
offerings from media groups
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Many
media groups offer not just a daily newspaper, but expand their offering into
business daily, sports weekly, business weekly, general fortnightly/weekly
etc. The economics rationale like in economies of scope. In an industry with
high fixed costs but low variable costs, the recovery of fixed costs accompanied
by low prices is possible only through large volume of single output or large
volume through multiple output using similar inputs. Therefore in a newspaper
industry, the manpower requirements are common or similar for each of those
offerings. A sports writer will not only prepare a daily report for the newspaper
but expand the same for the sports weekly. Similarly a political writer
builds a report for the newspaper but expands into an analytical piece for
fortnightly or weekly. The desk staff for editing, layout etc too can work on
multiple offering given the similar skill sets. The printing machinery is
common for across the board offerings. The printing machinery is used daily
night for printing newspapers but lie idle for the rest of the day. On one
day in a week, the same machinery will print a sports weekly, another day it
will print business weekly, perhaps once in a fortnight, it will print the
general fortnightly, once in a year at regular intervals, it might be used to
print yearbooks on specialised subjects etc. This increases the capacity utilization
of the machinery and human manpower and other software required in printing
media offerings. The increased capacity utilization thus spreads the costs
across multiple offerings generating what in economics is called economies of
scope.
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These five examples are illustrations
of how economics pervade our daily life. There are thousands of such instances
that we practice and act and consume without the knowledge of the underlying
economic theory behind such action.
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