Real Life Applications of Economics: Some Examples

 

There are many past posts wherein it has been attempted to explore the applications of economics in real life. Many textbooks as noted before, posit economics in abstract terms. Yet, at every stage of life, one finds subconscious applications of economic theories, concepts and models in real life. It is often conceivable that the agent is unaware of economics and is only applying what is common sense. Yet, economists theorise this common sense. In continuation with the past posts on economics and its real life applications, the current post will take a few more examples to illustrate the same.

Real Life Practice/ phenomenon	Economics Linkage
Rise of Brands	Firms operate in the normal course, in theory, in a perfect competition. In perfect competition, goods are homogenous, firms are price takers and thus have no control over the price. They have control only over the output. Yet firms seek some degree of control over the price. The control over the price will help them erect some barrier of entry, enabling supernormal profits. In the context of low barriers of entry, new firms enter into the market and wipe away the supernormal profits. One way of firms engaging in creating a barriers to entry is to differentiate themselves from the rest. They seek to position themselves in a unique way so as to convey to the prospective buyers they are different. Their goods are not homogenous. They might be close substitutes but not perfect substitutes. This is how the concept of identity to the product emerges. As the good takes an identity, there perhaps emerges a quasi-brand which over a period of times morphs into a brand. Brand is the identity that distinguishes the firm’s offerings from its competitors. It is the brand Close Up or Colgate or Pepsi or Coke that enables them to reap the supernormal profits. Therefore in economics, brands emerge as firms seek to escape the price trap of perfect competition in pursuit of their supernormal profits. Markets and competition through entry of new firms seek to eliminate these supernormal profits. In fact, interestingly, firms do enter into new markets only attracted by the supernormal profits. As more firms enter, the quest for differentiation increases to next level. There is a constant endeavour to differentiate and create an identity. Yet the market at each occasion, seeks to curb this identity. Therefore, the identity quest is more of a sliding scale and reflects a transient moments in the firm’s quest for its profits and market share.
People are increasingly watching movies in multiplexes than in orthodox theatres	For many years, film theatres have had an irresistible charm for the film afficandos. Yet in recent times, many of the movie theatres including in smaller cities and towns are closing down. It is easy to associate the same with the rise in television viewership, YouTube and of course in recent times, Netflix among others. While there is no doubt that these have played a role in declining viewership in movies in recent times, multiplexes continue to thrive. Of course, the current times of corona have resulted in the closure of these theatres but once the normalcy returns, these will perhaps see a comeback.   The answer to the same lies in the rising income levels. The multiplexes offer an experience perhaps few notches above the orthodox theatres. Yet the experience comes with an additional price. The consumer would pay for the experience to the extent of the marginal utility he attains through that marginal experience. The willingness to pay exists yet the ability might not. For many years, given the ability, the willingness might have been dampened. Given the income levels, a prospective consumer might not be willing to spend additional on the marginal experience given the marginal costs and marginal benefits.   As the incomes rise, the budget line of course too shift upward enabling the movement for the consumer to higher indifference curve. Relative to the income rise, the prices have remained constant or dropped. Thus the movie fans will have more reasons to watch in multiplexes than in the orthodox theatres.
Perishable goods	In the normal course of times, vegetables, fruits and other goods that perish over time are associated with the term perishable goods. Yet in economics, this is only partly justified. Any good that cannot be stored and has to be consumed instantaneously is considered perishable.   A hotel room if unoccupied for the night is perishable good. To the hotel, the revenue is generated only through occupancy. If occupancy is nil, it is zero marginal revenue and thus perishable. This is precisely a reason why hotels do offer rooms at lower prices during lean season. Lower prices result in higher quantity demanded and thus higher occupancy.   Similar examples could be flights or trains. Seats unoccupied in flights or berths unoccupied in trains are perishable goods. Therefore, the railways or the airlines have to maximise their revenue by maximising their occupancy. Hence in airlines too, one observes fluctuating prices relative to the patterns of demand. In railways, however, dynamic prices are a relatively new phenomenon undergoing its learning curve.   Some more examples of perishable goods are bus seats, tables in restaurants, cab bookings in aggregators like Ola or Uber, auto bookings, among many other goods.   In each instance, the marginal costs are relatively low or even negligible to accommodate one extra user or customer while there is a positive marginal revenue. Yet, while marginal costs are negligible, the fixed costs are high and can be recovered only at high volume.   Therefore, in case of perishable goods, the pricing has to change. There has to be dynamic pricing which caters to the mismatches between demand and supply and align the prices accordingly. This is something be observed in some cases yet, in absence of matching between the producer and the consumer it might not necessarily be perfect. However, in quest of perfection, the goods supply might be lost, therefore, as long as they generate a positive marginal revenue without significant marginal costs, the producers are okay with offering the goods at lower prices.

 

 

What has been discussed are few examples from different domains highlighting how economics helps us to theorize, structure and analyse better the practical scenarios. This is of import to business practitioners to independent analysts across board. The posts in the future will continue to illustrate few more examples from real life.