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Showing posts with the label economic theory in practice

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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Economic Tidbits of Sporting Events

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Sporting events attract fans and fan loyalty. As a matter of fact, across countries and provinces and towns sports can be great unifier and great divider. It is a paradox of sorts yet a fact. There is a loyalty towards a team and as the two teams or two individuals compete for a prize in their sporting event at different layers, the loyalty translates into an emotional outpouring of support which in itself is competitive. The emotions that come out from the rival supporters create divisions often difficult to heal at times. Each sporting event is a competition for a trophy. The trophy is inelastic conceivably to a large degree. There is just one prize on offer and just because many compete, the number of winners on offer doesn’t increase. The winner gets the rewards disproportionate to the others and thus most sought for. This operates at every layer. Even in the schools, the inter-school competition within the city or the sub-district or the district are the most sought after.
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Schelling's Equilibrium

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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
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Unlimited all the way- Diminishing Marginal Utility in Practice?

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As one walks in to a five star hotel, we find ourselves inclined to try Buffet Meals for a fixed price. Andhra restaurants have become popular for offering unlimited meals. As we visit few amusement parks, we find they charge a fixed entrance fee and let us enjoy unlimited rides. Mobile service providers woo customers by offering unlimited SMS per day at a flat fee. Bangalore Metropolitan Transport Corporation (BMTC) lures us to try its buses with a day pass (unlimited rides for a flat fee for the calendar day). Further for ages we have had the concept of Bus passes for students and frequent users as also the Suburban rail passes in Mumbai and other cities in India.   Internet service providers offer unlimited browsing per month for a flat fee. Unlimited rides in public transports, enjoy unlimited SMS, telephone calls, internet usage or even unlimited cuisine sound attractive and are part and parcel of our daily economic life. Yet step back and wonder what logic prevails here. Th
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