Monday 9 February 2009

The importance of perception in Economics.

I think to answer this question we should first understand the meaning of the word "perception". Oxford dictionary define this word as "a way of understanding or interpreting something".

So what is the importance of understanding in Economics?
This question can be discussed from two different points of view:
microeconomic and macroeconomic.

In typical microeconomic model we usually have three sides:producers and consumers and the government. 

  • From the point of the producers right understanding of the situation in the market is essential. Producers should decide what they should produce,the amount of goods/services they should produce and how to produce that. So wrong perception of markets is likely to lead to an economic inefficiency("wrong" good supplied, shortage/surplus of the good,productive inefficiency)
  • From the point of the consumers right understanding of the market system is also important. In my humble opinion perception in this situation is similar to expectations. Expectations influence demand and therefore may also lead to an economic inefficiency.For example, if people are said that there is no more salt left in shops, they will increase demand and therefore buy all salt from the shops.
  • From the point of the government wrong perception of the economic situation is likely to lead to the government failure and therefore greater economic inefficiency.

In typical macroeconomic model we also may define three main macroeconomic agents: firms,households and the government.

  • Firms should have right perception of the economic situation to decide on the production(as well as producers in the first model),they also should have confidence in current economic situation  to plan investment.
  • Households should have the right perception of the economic situation as well as have  confidence in it. These elements combined will encourage households to spend more and save less therefore improving economic performance of the country.
  • Government should understand current situation in the country because wrong policies may ruin not only economical prosperity but also may damage every other sphere of people' life.

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