Economics of Cloud Computing

80-20 Problem and Cloud Computing

Economics of Cloud Computing: Scarcity refers to the uneasiness between organization’s limited resources and its endless wants and needs. For an organization, resources include Compute, Storage and Networking Infrastructure. In conventional IT environment, upfront investment is the biggest barrier. On top of that, resources are limited and the utilization of limited resources is also inefficient. Virtualization resolves the issue and makes the resource utilization better than the regular approach. The emergence of cloud services is again fundamentally shifting the economics of IT. Cloud technology standardizes and pools IT resources and automates many of the maintenance tasks done manually today. Cloud architectures facilitate elastic consumption, self-service, and pay-as-you-go pricing.

The introduction of this general purpose technology can provide a fundamental contribution to promote growth and competition and it can help the economy to recover from a severe downturn. Economic impact of advancement in the hardware-software field is considerable which is going to have a powerful effect on the market structure of many sectors and on the global macroeconomic performance in the next years.

Business Economics has always been a powerful force in driving industry transformations and as more and more customers assess cloud computing investments strategies that will considerably affect ROI.

Macro and microeconomics are the two vantage points from which the Cloud economy can be observed. Micro and macroeconomics are intertwined; as Cloud economists gain understanding of Cloud phenomena, they can help nations and individuals make more informed decisions while using cloud computing.

Production Possibility Frontier (PPF)

Under the field of macroeconomics, the production possibility frontier (PPF) represents the point at which an economy is most efficiently using resources, therefore, allocating its resources in the best way possible.

Production Possibility Frontier (PPF)
Production Possibility Frontier (PPF)

The production possibility frontier shows there are limits to production, so an economy, to achieve efficiency, must decide what combination of services can be produced.

If there was a change in technology (In our case it’s a disruptive innovation named Cloud Computing) while the other factors remain the same, execution time or time to market will be reduced significantly due to elasticity, pay as you go billing model and flexibility. Output would increase, and the PPF would be pushed outwards. A new curve would represent the new efficient allocation of resources.

The macroeconomic impact of the diffusion of this new general purpose technology may be quite large, as it happened for the introduction of the Internet.

Opportunity Cost

Economics of the Cloud is the field of study concerned with Cloud computing that deals with the production, distribution, and consumption of IT services. With “Economics of the cloud”, scope is certainly not limited to Cloud Computing paradigm’s Financial Benefits. It is more about choices Cloud customers make, and to inquire into why?

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Economics of the Cloud should show the way and should not confuse the adopters. In case of Cloud, more of Microeconomics will be critical which includes various aspects such as agility, creativity, innovation, social impact, trust and risk, economic values and, scale of trade off.

Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative foregone (that is not chosen). The opportunity cost is also the cost of the foregone products after making a choice. Opportunity cost is a key concept in economics, and has been described as expressing “the basic relationship between scarcity and choice”.

In such an environment the opportunity cost of moving to cloud computing is paramount because it entails a commitment in ‘sunk costs’: those are costs that underpin the venture. This must be viewed together with potential yield, i.e. the carrot in the hype.

80-20 Problem and Cloud Computing
80-20 Problem and Cloud Computing

Solution of “80-20” Problem is “20-80”: In computer science and engineering control theory such as for electromechanical energy converters, the Pareto principle can be applied to optimization efforts.

Cloud Computing is a force that helps flip this ratio and gives IT departments the ability to spend 80% of their time on core business processes, such as business application design. It’s for this reason, the ability to go from 20% of time and money dedicated to core business processes to 80%, that the economics of Cloud Computing is so compelling. Nowhere is the current model’s inefficiency more evident than in the opportunity costs that organizations pay to manage their own computing needs.

References

http://www.investopedia.com/university/economics/economics3.asp#axzz1nCdiFuXa

http://en.wikipedia.org/wiki/Pareto_principle

http://infocus.emc.com/choong_kengleong/cloud-economics/

http://safegov.org/2011/11/1/government-decision-making-the-economics-of-cloud-computing

http://en.wikipedia.org/wiki/Macroeconomics

http://en.wikipedia.org/wiki/Microeconomics

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