Economics and Society (Week 9 (Chap 13: Game theory and Strategic Play) (3…
Economics and Society
Week 9 (Chap 13: Game theory and Strategic Play)
3. Example #1: Prisoner's Dilemma (Confess / Hold-Out)
Both Collaborate = (2 years); (2 years)
(0 year=Walk free), (10 years=get implicated)
Both Compete = (5 years); (5 years)
"number of years each player receives"
Player 1 (row player); Player 2 (column player)
Do no confess
When you confess = you implicate your partner and walk free
= Both players end up MORE years in prison
(than if they co-operate by "holding out" / "not confessing")
DOMINANT strategy = To "CONFESS"
"years in custody"
Both players compete; they have incentive to betray /implicate each other by confessing
instead of collaborating
2. GAME THEORY:
"What should you do?"
(i) Think about every possible action of other player
(ii) then, what your best choice is for each of them
(lll) if you have "same best response" for every possible strategy of there other player = DOMINANT STRATEGY
Four Examples to illustrate Game Theory
1 Nash Equilibrium / 2 Nash Equilibrium
"mutually beneficial behavior may not emerge!"
4. Example #2: Airlines (High /Low Price for return ticket)
Players: Airline 1/ Airline 2
Charge LOW air ticket price
Charge HIGH air ticket price
Charge LOW price = win customers from rival airline, and gain MORE profits
Both charge LOW price = ($100mn); ($100 mn)
"amount of profit each player receives"
Both charge HIGH price = ($120mn); ($120 mn)
LOW; HIGH = ($140); ($70)
DOMINANT strategy =
"To Charge LOW price"
Both players compete; they have incentive to charge LOW price to get MORE profits
Charging LOW price
"wins customers from rival"
instead of collaborating to charge HIGH price
Collude = Charge HIGH price, but players have incentive to cheat!
= Both players end up with LOWER profit
(than if they cooperate by charging a HIGH price)
1. Motivation (Scissors / Paper / Stone)
5. Example #3: Pollute or Not to Pollute
Not to pollute
Each firm uses water from the canal for production, and dirty water is costly to clean
"amount of profit each player receives"
If both firms DO NOT pollute = ($70K); ($70K)
If both firms pollute = ($50K); ($50K)
If one pollutes and the other does not = ($90K); ($5K)
Players (Firm 1 and Firm 2)
DOMINANT STRATEGY =
instead of collaborating to
They need to spend more to reduce pollution
Both players compete; they have incentive to pollute and earn MORE profit
= Both players end up with LOWER profit
(than if they cooperate by NOT polluting)
Example #4: Work or Surf?
If both players work = ($400); ($400)
If both players surf = ($200); ($200)
"amount of dollars each player receives"
If one player work and another surf = ($300); ($500)
if both goes surfing, shop is closed. Benefit = surfing joy; if both works, shop gets maximum profit
One surf and another works
Depends on assertiveness of player
There is TWO Nash equilibria
= Both players end up with LOWER satisfaction
(than if they cooperate by working)
Players (you and Gina)
Topic 2: Households and Firms Interactions
2a. How do buyers behave?
Quantity demand (movements along DD curve)
Demand (Shifts in DD curve)
2b. How do sellers behave?
Quantity supply (movements along SS curve)
Supply (Shifts in SS curve)
2c. How do behaviour of buyers and sellers jointly affect the market?
Competitive equilibrium / Equilibrium price (Qty SS=Qty DD)
Shortage (Qty DD > Qty SS: price below Pe)
Surplus (Qty SS > Qty DD)
Effects of shifts in DD and SS (4 possible outcomes on P and Q)
a) Price ceilings (Gasoline 1970's)
b) Price floors (Minimum Wage)
c) Taxation (Gasoline)
Oligopoly (homogenous vs differentiated product)
Buyers / Sellers
Week 12 (Chap 21: Economic Growth)
2. How does a nation's economy grow?
(i) Physical capital K accumulation: Savings and Investment
(ii) Total efficiency units of Labor H=L*h
(iii) * Technological change
1. The Power of Economic Growth
Constant vs Compounding / Exponential growth rate
Example: interest earned
Constant vs Proportional Scale
Example: Rich and Poor countries
Group Presentation (Teams 3 and 4)
5. Growth, inequality and poverty
3. History of Growth and Technology
Week 7 (Chap 7: Perfect Competition and Invisible Hand)
1. Perfect competition
Maximising Total / Social surplus
Example: iPhone example
3. Interference of invisible hand
2. Invisible hand
(i) Efficiently allocates g&s to buyers and sellers
x (ii) Leads to efficient (least cost) production allocation "within industry"
(iii) allocates resources efficiently across industries
Review mid-term paper
Week 10 (Chap 19: Weath of Nations)
Income per capita: How to measure differences across countries? What causes differences? How long do the differences persist?
How does differences relate to life expectancy?
How does it impact number of babies per woman? CO2 emissions?
GDP : What causes economy to grow / slowdown / go into recession? How does it affect unemployment?
National Income Accounts
Measuring aggregate economic activity
Expenditure Approach (Y = C+I+G+X-M)
Circular flow diagram
Gross Domestic Product
What isn't measured by GDP
Real vs Nominal
Application #1: President's salary
Application #2: Minimum wage law
What is macroeconomics?
Group Presentation (Teams 1 and 2)
Weeks 13-14 (Chap 27: Countercyclical)
2. Counter-cyclical Monetary Policy
Expansionary / Contractionary
(b) Open Market Operations
Federal Funds Rate
Impact of MP (Short run and Long Run interest rates)
Increase / Decrease
bank's reserves deposited at the Fed
View #1 Federal Funds Market
View #2: Balance Sheet (Fed and Citibank)
buys / sells
government bonds from / to Commercial Bank
(d) Effectiveness of MP
Real interest rate = Nominal interest rate less inflation
(e) The Taylor Rule
(a) Types of interest rates
Federal Funds Rate
Prime Lending Rate
3. Counter-cyclical Fiscal Policy
1. Role of Counter-cyclical policies in economic fluctuations
Group Presentation (Teams 5 and 6)
Topic 1: The Study of Economics
About the course
Class Participation (5% + 5%)
Online Quizzes (5%)
Mid-Term Test (20%)
Final Exam (40%)
Group Project (25%)
3 principles (Optimization / Equilibrium / Empiricism)
Intuitive (supermarket queuing)
Economics (invisible hand using DD and SS Model)
Everyone is optimizing
testing ideas using data (to develop good theory)
developing models to explain and predict human behaviour
Example: Apartment rental
(closeness to office)
Direct cost (rental)
Indirect cost (traveling time, opportunity cost)
Total value analysis
(b) Calculate Total Net Benefit = Total Benefit - Total Cost
(c) Pick option with highest Total Net Benefit
(a) Translate all costs and benefits into common units ($)
Scarcity (money / time / calories)
Income: seafood vs steakc / pens and pencils
Slope of BC = Opportunity Cost
Mugs and pots
Ceiling lights vs gums under table
Guns and butter
Constant OC vs Increasing OC
Week 3 (Chap 5: Consumers and Incentives)
1. Buyer's Problem (max utility)
(b) "How much does it cost?"
(c) "How much money do I have?"
(a) "What do I like?"
Budget constraint line
Price of good X and Price of good Y
2 goods (X/Y)
Slope and Opportunity Cost
Impact of "price change" on Budget Constraint line (pivot)
Impact of "income change" on Budget Constraint line (shift)
3. Demand curve
b) Consumer surplus
c) Demand elasticities
Advertising and promotional pricing
Determinants of PED
Necessity (gasoline) vs Luxury (yachts)
Small (salt) vs Large (car), % of income
Short run vs Long run
Substitute good (Coke vs Pepsi)
Complementary (Beer and Peanut / Sheng Siong)
IED<0: Inferior good
0 < IED < 0: Normal and Necessity
IED>1: Normal and Luxury good
Application: Are babies inferior good?
Application: NTUC housebrand
Application: McDonald (PED, X-PED, IED,
a) Derive DD curve for jeans (income=$300; Price sweater=$25)
d) Price discrimination
First degree discrimination (Firms charge max possible price for each unit consumed)
"What is your maximum willingness to pay?"
Example: Professional services
Second degree discrimination (Firms charge different price for different quantities consumed)
Example: Pizza (Starving vs Hungry)
"How many units are you willing to buy, and pay?"
Third degree discrimination (Firms charge different price to different consumer groups)
Example: Singapore Zoo (Local vs Foreigners)
Elasticity of different consumer groups
elastic (students /elderly / low-income / budget)
inelastic (working adults / young adults / high-income / business)
Example: Taxi rides, or ERP (Peak vs Off-peak period)
"How sensitive are you to pricing?
How to distinguish customers?
can identify members of "low value" and charge them lower price
2. Make decision at the margin
(Marginal benefit/ Price)X = (Marginal benefit/Price)Y
Example: Sweater and Jeans
Week 4 (Chap 6: Sellers and Incentives)
2. Seller's Problem (max profit)
(a) Production: "How to make the product?"
Production function (output = (f (Variable inputs + Fixed inputs)
Law of diminishing returns
Marginal product / Average product
(b) Cost: "What is the cost of making the product?"
Cost function (Variable cost + Fixed cost)
Marginal Cost / Average Total Cost / Average Variable Cost / Average Fixed Cost
(c) Revenue: "How much can I get for the product in the market?"
How much to make / What is the market price?
SS & DD (Market vs Firm)
Producer surplus and Economic Profits
3. Make decision at the margin
Profit maximization; Loss minimization (MR=MC)
LR Competitive Equilibrium (economic profit = 0)
Free entry market (SR economic profit > 0)
Free exit market (SR economic loss < 0)
MC curve is SS curve
Exit market all together (LR)
Shut down temporarily (SR)
Short Run SS curve
Long Run SS Curve
1. Perfectly competitive market
No buyer/seller big enough to influence market
sellers produce identical goods
Sellers can freely enter/exit the market
MidTerm Test (15%); Online / Lockdown browser
Week 11 (Chap 20: Aggregate Incomes)
Aggregate Production Function
"More is better"
"Law of diminishing marginal product"
"Movement along production function"
Physical capital stock, K
Total efficiency units of labor, H = L * h
Total number of workers, L
human capital, h
Index of Technology (A)
"Shift in production function"
Knowledge (R&D spending)
Efficiency in production (organization of factors of production)
Inequality around the world. Why?
Week 14 (Revision)