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Showing posts with the label economies of scale

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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The Economics Origins of BCG Matrix

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  Economics has diversity of applications across streams. The applications range from management to business studies to national economies to politics to societies to history among others. Economics by its very nature has direct applications in the field of business theory. Many business theories, concepts, models, principles or whatever they might be have their origin in the domain of economics. The past posts have discussed such examples from the field of management theory that can be traced to economic roots. One such application that would be discussed in the current post would be the Boston Consulting Group (BCG) Matrix. Sometime back, there was a discussion on the application of BCG matrix in the context of sports popularity and innovation. The current post however would seek to locate BCG matrix in the context of economic theories and models.   As is well known to students of management, BCG matrix finds its application in product portfolio management. The products in the fi
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Economies of Scale and Natural Monopolies- A Note

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  The world often seems of puzzles yet they go unnoticed. Yet to an economist or rather a student of economics, these puzzles are the ones which challenge their mind and thought process. Let us take a few instances. Across countries, we find a single railway company operating railway lines. If there are multiple companies, they operate in different geographic zones. For example, one would not find multiple companies laying railway lines between two cities let us say Mumbai and Delhi. Similarly electricity transmission too observes just one company operating as the power gets transmitted from the power generation source to the local transmission set ups for further distribution to households, industries and commercial establishments. The same observation can be made of water distribution companies. From the source of water till the local water tanks, one finds only pipeline being laid and there are no competitors found in this instance.   In economics, competition is the bedrock of
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A Primer on Real Life Action and Economics- I

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We often use economics subconsciously as we go about our daily routine. Economics is about human actions and behaviour and we engage in plenty every day from birth to death. These actions consistently demonstrated over period of time reveal patterns that build up the theoretical and conceptual foundations in economics. Quite often, many actions undertaken either in personal, social, or professional capacities might occur without any explicit linkage to economics but each of those actions perhaps reveal something about economics and its idiosyncrasies in life. Presented below are few examples in tabular form. One column highlights the real life phenomenon what we observe, while the second column builds up the theoretical linkage to economics. Real Life Practice/ phenomenon Economics Linkage Free E-mail services It might be puzzling to find why Gmail offers free email services. Given the server capacity they possess, any addition of extra user to
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Production Malls!

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To Alfred Chandler, the edifice of the business landscape was centred on the domination of the big. As someone described him, he was hunter of big game and collected trophies in both US and Western Europe. For Chandler, scale and scope characterized the flora and fauna of business, thus a critical role for the volume and diversification. The hunters of the small game, in the backdrop of the above, would find difficult to sustain in the long run. Chandler’s assertions, incontestably, command certain merits. Firms whose cost structured is preponderated towards fixed costs necessitate large volumes for subsistence. Fixed costs apportioned over large volumes pull down average fixed costs creating conditions for economies of scale.   Simultaneously, as the firm gains weight, there would be increasing difficulties in organization management thus generating certain diseconomies of scale. The trade-off that firm is able to execute and balance will define its wherewithal.   Large industr
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