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Economics of AI

Has AI changed the world economy? How has AI improved the way we do business? What has been its impact? We will discuss. Let us start with the definition first.

"Economics is a social science that focuses on the production, distribution, and consumption of goods and services and analyzes the choices that individuals, businesses, governments, and nations make to allocate resources." - Investopedia

So what if the production and distribution of something become cheaper? Historically there is so much evidence to prove that consumption will increase when the cost of production & distribution becomes cheaper.

Given that computing power is becoming cheaper nowadays, machine learning is no longer an academic exercise. As it becomes affordable, every business has converted virtually every arithmetic problem into an AI problem.

For instance, once purely an HR problem like recruiting has now become a prediction problem. The same is the case with promotion and retention in HR. Hence, as the prediction becomes cheaper, the non-prediction issues are converted into prediction problems to take advantage of AI systems' affordable prediction solutions. Therefore the consumption of AI has increased tremendously in the last five years.

Secondly, when something becomes cheaper, its substitutes will also become cheaper. So, for example, when the monthly subscription for a particular gym gets cheaper, other gyms of that category will also reduce the tariff to be competitive in the market. The same is the case with mobile plans, consumer durables, etc.

What if the prize of the substitute is not changed? The law of demand states that the consumer will move to the product/service that is cheaper.

So when AI prediction is affordable, its substitute should also become cheaper. But what is a substitute for AI prediction? Of course, it is a human prediction. But, will it ever become cheaper? Unfortunately, the answer to this question is "No". So, we all fall back on AI prediction. Eventually, the demand for human prediction comes down drastically.

Thirdly, when something becomes cheaper, its complements will become more expensive. But what is a complement?

"A Complementary good is a product or service that adds value to another." - Complementary Goods Definition (8 Examples and Graph) - BoyceWire

A few examples are 'sugar complements coffee', 'cereal complements milk', and 'coffee shop within the exhibition complements book exhibition. Let me explain the last example in detail. You will get books at an affordable price in the exhibition, so more people will attend the exhibition. But the coffee shop doesn't have an unlimited supply; hence, it increases the price to meet the elevated demand. So now you understand why coffee is more expensive in exhibitions and seminars?

Btw, what is a complement in AI System? Human judgment. let us apply the third rule. As AI system predictions become affordable, human judgement becomes expensive. What action you take using AI prediction is based on your judgement. Your judgement is dependent on prediction accuracy and the cost of prediction error. This human in the loop is expensive as your judgement will result in an action such as convicting a criminal, reporting a customer as fraud to the regulator, or prescribing medication to the patient.

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