Why most things fail

Standard
Why most things fail

Evolution, Extinction and Economics (2005)
By Paul Ormerod

Surprisingly, I didn’t know this is more of an economics book until I read it. I guess the economics major that I took in my university days prove to be useful to understand some of the concepts mentioned.

 

The author talks about the concept of risk and uncertainty and their distinction. Risk refers to situations in which the outcome cannot be known with certainty, but the probability of any given outcome is understood perfectly. Uncertainty refers to situations in which the probability of the various outcomes is itself unknown. There are numerous examples in which he exposes most of the flaws of today’s economic assumptions.

 

For example in Economics textbooks, there is the formula of set price equal to marginal cost (Price = Marginal Cost) to maximize the amount of profit for a firm. However in practicality,  it is not useful as firms may not know the its cost curve and setting of price makes the assumption of the amount of full information and knowledge the firm is supposed to have. With advanced of technology especially online, marginal cost may also be virtually zero. Hence, if a firm charge its price equal to marginal cost, which is zero, the company would soon go bankrupt.

 

Almost all brands fail eventually. More importantly, most fail very soon after their introduction. (whether internal or external factors)

The attrition rate in early life is very high. Companies know this to be an inherent fact of life and they respond by constant innvoation, constant testing of new ideas and new brands, new products. They do so within a framework, an institutional structure, which itself has adapted over time, has evolved, and which facilities flexibility and innovation. Based on the author, innovation is the best strategy for individual survival, and it is a strategy from which we all, as consumers and citizens, have benefited immensely.

 

I guess I do know the answer before I read the book that the “key to survive is to innovate”.  The author does highlight a number of interesting economics concepts and the flaws, which I find it very interesting.However, I find it quite disappointing that the author choose to end off the part in such a manner for a call to innovate.

Advertisements

2 responses »

  1. Price = Marginal Cost is NOT standard economic advice and thus it is wrong to suggest that this is a criticism of the economics profession or of economics in general.

    Instead, MC = MR (Marginal Cost = Marginal Revenue) is the standard by which we judge how to price and how we should maximize profit. There is a difference! The marginal revenue (which is the extra income that you receive when you sell an additional unit of something) can be (and oftentimes is) less than price.The reason is simple: raising price reduces demand. Therefore, the marginal revenue at any given price point will usually be less than price since you cannot sell any more product without lowering the price (indeed, at a zero price, BY DEFINITION, MR cannot be zero since raising the price by $0.01 will almost certainly bring in SOME revenue, so by that account, economic theory states that P > 0 in all cases where the good is valued at all–therefore, when MC = 0, you should raise price until you get no additional revenue).

    The only time when P=MC=MR is under perfect competition where the competitors are so small relative to the market that they actually have no effect on the market. However, this too is a problem when you consider that there are almost no markets that are actually perfectly competitive ones. Furthermore, there is actually debate as to whether ANY market qualifies for perfectly competitive due to the fact that the market as a whole always faces a downward slopping demand curve (thus the only way that a market can truly be perfectly competitive is when one firm increases sales another firm must decrease them at the same rate, thus ensuring that one firm’s sales ALWAYS comes at the direct and proportional expense of another firm).

    Zagros Madjd-Sadjadi, Ph.D.
    Associate Professor of Economics and Chair, Department of Economics and Finance
    Winston-Salem State University

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s