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Showing posts with the label barriers to entry

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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Internal Protests and Global Provocations

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  While the farm protests continue to linger on, there seems to be some new turn every now and then. These turns at times do add some drama and perhaps some comic relief to the observers. One such element that seems to have stirred some debate in the last twenty four hours so has been a few tweets in support of the protests by some celebrities. This might not seem surprising but then those celebrities or so-called celebrities have nothing to do with India. Late evening yesterday, singer Rihanna tweeted in favour of the farm protests followed later by porn actress, Mia Khalifa. If this was not enough, in between them, the child environmental activist Greta decided to add her voice. Meena Harris, whose claim to fame lies in she being the niece of US Vice President also decided to add her voice. These voices were sufficient to be a catalyst to the voices of the Indian opposition and the farm protest supporters. They see this as an internationalisation that would eventually hurt Modi and b
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Controlling the Essential Resource and Firm Monopoly

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  Economic theory begins with the proposition that firms compete in the market on prices. If a firm were to offer higher prices than its competitor, the buyer will shift to those competitors who are offering the lowest price. Therefore, the sales would be nil if the competitor charges higher prices than their rivals. If one firm lowers the price, all firms will follow suit, yet if one firm increases its prices, the others would not follow suit. The assumption of course is the goods are homogenous. There is no differentiation. Therefore, in this scenario of perfect competition, the firms become the price taker with the market setting the price. The firms have control over the output they produce but no control over the price. Yet the firms will seek to control the price.   In absence of control over the price, the firms might not be in a position to gain and sustain supernormal profits in the long run. This is due to the absence in barriers of entry and exit. The presence of superno
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Monopolistic Competition and Barriers to Entry: Some Notes

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  Economic theory advocates competition for social welfare. As the completive intensity increases, there is an increasing rush to reduce prices. Firms reduce price till such a point of time wherein their marginal costs are equated to the prices. In a perfect competition, the firms have control over the output but have no control on the price. They are price takers, in other words, prices are determined by the market. This is so because of the homogeneity of the product thus negating the possibility of differentiation. Furthermore, in perfectly competitive world, the barriers of entry are nil. If there arises the existence of supernormal profit, other prospective suppliers are attracted by this possibility thus planning their entry into the market. As new players enter into the market, the output increases. Implied is an increase in the goods being offered for sale relative to the demand for goods. The imbalances thus created in supply and demand make firms reduce price which will proce
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Pakistan and Role Model Dilemma

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As one comes to terms with the horrors of the recent massacre of school children in Peshawar, What probably went unnoticed were the names of the children who either died or escaped.   Names like Osama, Dawood Ibrahim seemed common.   In a world where names are usually associated with aesthetic or even predictive powers, these names mean something. If names are meant to convey certain signals, these do certainly reflect in a way contemporary mindset of an average Pakistani.   Stephen Levitt in his bestseller, Freakonomics goes on to discuss the economics behind names. Yet, the explanation does not answer satisfactorily, the state of affairs. Incidentally, the broader theme around which Levitt’s ideas revolves around- role of incentives; might help us in some way to understand what it means.   At the heart of the society and its inhabitants is the need to achieve, urge to succeed, climb the higher layers of the power pyramid, places oneself at the apex of the profession. Yet to
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