Posts

Showing posts with the label Equilibrium

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

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

Schelling's Equilibrium

Economics text books describe equilibrium as intersection of demand and supply curves. In a market economy analysis, a shortage of goods (demand > supply), the prices will rise incentivising more number of producers to enter into the market. The increased supply of goods accompanied by a drop in quantity demanded following a rise in price will restore the balance in the market. Similarly, a scenario of surplus (supply > demand) causes a drop in prices. The drop results in increase in quantity demanded yet at the same time disincentivizes production causing a fall in quantity supplied till the market is restored back to equilibrium. Yet the concept is quite non-intuitive. It seems it is more of text book idealism than something that can be observed in practice.   Equilibrium as a concept takes its roots in biology and physics rather than economics. In natural and pure sciences, equilibrium is described as a situation in which some motion or activity or adjustment or respons