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Showing posts with the label consumer equilibrium

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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Output Saving and Digital Domain

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Both production and consumption no longer resemble what we have envisaged them over last 300 years or so. As we begin the third decade of the 21 st century, the economic universe is stark in it contrast to its look a mere 80 or so years ago. Simon Kuznets and team ‘invented’ the concept of GDP in 1937, yet eight decades down the line, the limitations of the same are getting becoming ever more visible. The answers lie in the emergence of what one terms the information revolution. Internet and subsequent rapid diffusion has touched upon daily lives in many ways. Manifest is the new theoretical discussion on the role of production and consumption in microeconomic literature.   Economics functions on the notion of scarcity. Implied is constant endeavor to produce goods using lesser and lesser resources. In production analysis, isoquants represent locus of all combinations of inputs producing same level of output. Derived from the same is the idea of least cost production. Factoring
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Rational Spending Rule : To be rational or not

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Rational spending rule, despite the abstract derivation, can be used to make sense of several real world phenomenon.                                                 Some cities have grown vertically while the rest have grown horizontally. To use popular analogy, it can be described as the lift vs the car model. The answers can be sought in utility analysis. Cities which are short of space find it difficult to accommodate people close to the city center. The cost of land being high deter people and either move them to the margins or compel to look at alternatives. Similar is the case with commercial space in land starved locations. An analysis would probably reveal a greater spending on alternative goods than housing.   It need not necessarily be for upper income groups alone. Experts have often wondered on the increased consumption of consumer electronics or durable goods in poorer localities. Dharavi in Mumbai may not have enough space to provide basic housing and sanita
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Corner or convex solutions –Mahabharata to Jinnah to Anna Hazare

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Indifference analysis enables locating the optimal consumption bundle of typical consumer. Corner solutions are exception to law of equi-marginal utility. But do they occur in practice? The answer is yes if one is prepared to go beyond the text book. Few examples are in order. Corner solutions refer to the situation wherein the consumer is happy when he has all of one good and none of the other. He either wants all of it or none at all. Take the example of Mahabharata. Pandavas and Kauravas fight for the land of Hastinapura.   Bheeshma’s solution of division of the territory did not solve the matters but postponed it. The game of dice and Pandava’s consequent exile resulted in Duryodhana ruling over the Indraprastha hitherto ruled by the Pandavas.   Post their return from exile, there were multiple options. The whole kingdom could go either to Pandavas or to Kauravas or a division could happen which could allot varying proportions to the both the parties. Bheeshma’s formula r
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