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Showing posts with the label production function

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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Existence of Firm is Rational!

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Classical and neoclassical theories stressed the primacy of the markets for transactions. To theorist of both the schools, the invisible hand manifesting through the price mechanism, resolves the imbalances that exist arising of the mismatch of demand and supply. Yet the ground realities suggested a sort of paradox. Of the total transactions that were observed in real life, the market based transactions occupied a smaller share. Most transactions seem to be occurring internally within an organization. The presence of the firm could not satisfactorily be explained by the early theorists. Profit maximization and utility maximization the key drivers of the neoclassical revolution seem to find limits to this power. The paradox was resolved by Ronald Coase who laid the foundations for transaction cost theory. To Coase, “ market prices govern the relationships between firms but within a firm decisions are made on a basis different from maximizing profit subject market prices. Within t
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Big Data and Diminishing Returns

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In many industries has become the buzzword. Scarcely a discussion seems to happen without touching upon the perceived advantages of big data. Firms seem to outcompeting with each other in collecting reams of data. The question however is the effectiveness of this data. The firm’s outcomes are determined primarily by the utilization of big data rather than collection of data per se. Ferreting out big data is a challenging task. Although the big data presents a data set that shows 10X or 100X in relation to existing mechanisms, it does not necessarily convey 10X or 100X worth of increase in insight. While the implication of big data is that quantity is paramount, the returns generated do not match the quantity of data generated. Big data too is subject to diminishing returns. Experts point out, it is not per se the data that should be big, but the primary factor that counts is the diversity of data. Even if datasets may be small, the amount of richness they provide when the
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