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Showing posts with the label aggregate supply; economic shock; induced shock; economic growth;

Decision Making as Output and Bounded Rationality

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  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
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Macroeconomics of Pandemics

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For many decades preceding the Great Depression, the economic theory was rooted in the production and supply analysis. Say’s law in a simplified form suggested “Supply creates its own Demand”. Implied was firms would produce goods and they would have their takers. If there was excess supply relative to demand, the price mechanism would come into effect creating a drop in prices. The drop in prices thus would increase the quantity demanded while at the same time reducing the quantity supplied thus restoring the equilibrium. The notion of equilibrium was dispelled in the Great Depression when low prices did not create the corresponding increase in demand. The answer to the puzzle was first articulated by John Keynes who argued there is deficiency of demand and thus the government had to play a role in fulfilling the lack of demand. In other words, Keynes suggested that demand creates supply. The Keynesian formulation laid the foundations of macroeconomics and with it the framework
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