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Friction Free and Low-Friction Economy

Do some research on a topic known to economists as the 'friction-free' or 'low-friction' economy. Early writers on this topic foresaw many of the seismic shifts that have occurred in the market place over the past one to two decades. Some of these early writings on 'friction' discussed many of the business tools we now think of as either commonplace or even obsolete. It is sometimes hard to imagine that businesses once embraced overnight mail, inexpensive fax machines, and email as being as monumental as we now think of business web sites, smart phone apps, Facebook, business portals (such as Amazon), and Google. The business tools becoming available may have been different, but the impacts on business strategies were dramatic. Once you have done your research, tell your classmates what you found, where you found it, and who the authors of the material are.

Next, tie the idea of a friction-free or low-friction economy to the concepts of demand and supply, and demand elasticity , two major topics in Managerial Economics. Some ideas that might be debated include, but are not limited to:

What is the connection or correlation between the amount of 'friction' in an economy and demand and supply? Does a relationship even exist? How can we quantify the relationship?

As friction in an economy decreases or increases, how is the demand for a firm's product or service impacted (does anyone remember when a traveler contacted a travel agent instead of Kayak for an airplane ticket, and the ticket was printed and presented to board a flight?)? Does it increase? Does it decrease? How can we measure the impact? How does the elasticity of demand for a firm's products change, if it does change? Are all firms impacted the same? Why or why not?

Is there an integral connection between friction in an economy and elasticity of demand? Why do you believe there is, or why do you believe there is not? If there is a connection, what is it? Can we measure or specify the relationship? If yes, how do we do so?

Solution Preview

What I gave you here is an outline. The frictionless idea is largely a phony one, since it does not take the economic system as a whole into account: it only deals with retail costs and little else. Of course, that's my opinion and need not be yours.I have laid out your variables and the firm that might work (Amazon). Now, you can put it together.

The question of the "frictionless economy" exists only with prima facie plausibility. There is no specific aspect of frictionlessness that is special with the exception of those areas where human power and ability cannot be replaced. Things like medical care, musical compositions and new ideas are expensive. Things that can be replaced with computerization within the "information economy" have a tendency to be slowly reduced in price.

The frictionless economy is one where transaction costs have been reduced to the bare minimum. Or at least, the more obvious transaction costs are reduced to a minimum. The information technology available today allegedly does several things: first, increases the amount of knowledge available to the public; second, makes buying and selling instantaneous, which, third, connects demand immediately with production.

As always, those who benefit from such a circumstance are the first to trumpet both the revolutionary nature of the phenomenon and its inevitability. As TG Lewis states:

Why is the friction-free economy non-Keynesian? It does not obey the supply-equals-demand rule of classical economics. Why is it non-Newtonian? What goes up does not come down. Newtonian mechanics cannot explain the phenomenon; only mathematical chaos can. This new brand of economics overthrows the postindustrial-age idea of efficiency, diminishing marginal returns, and cost-effectiveness. In short, it dumbfounds even the economists.

The general view is that demand is spurred by the simplicity of ...

Solution Summary

The friction free and low-friction economy is examined. The connection or correlation between the amount of 'friction' in an economy and demand and supply.