What is Game Theory in Economics?

Besides Cricket, poetry, tweeting, Friends and Fun there is another thing which is very important and that is to study the course books :P but as the Cricket season has surrounds us all i thought why not study some thing that matches the interest so i chose "The Game Theory" Lets start with the definition!

Definition 1:


"Game theory is the science of strategy. It attempts to determine mathematically and logically the actions that “players” should take to secure the best outcomes for themselves in a wide array of “games.” The games it studies range from chess to child rearing and from tennis to takeovers. But the games all share the common feature of interdependence. That is, the outcome for each participant depends on the choices (strategies) of all. In so-called zero-sum games the interests of the players conflict totally, so that one person’s gain always is another’s loss. More typical are games with the potential for either mutual gain (positive sum) or mutual harm (negative sum), as well as some conflict."Definition 2:Set of concepts aimed at decision making in situations ofcompetition and conflict (as well as of cooperation andinterdependence) under specified rules. Game theoryemploys games of strategy (such as chess) but not of chance (such as rolling a dice).Definition 3:
Game theory attempts to look at the relationships between participants in a particular model and predict their optimal decisions.Definition 4:

A mathematical method of analysis used in operational research to predict the outcomes of games of strategy and conflicts of interest. It is used to assess the likely strategies that people will adopt in situations governed by a particular set of rules and to identify the best approach to a particular problem or conflict. Explanation:

1. Game theory was pioneered by Princeton mathematician john von neumann.
2. In the early years the emphasis was on games of pure conflict (zero-sum games).
3. Other games were considered in a cooperative form.
4. That is, the participants were supposed to choose and implement their actions jointly. Recent research has focused on games that are neither zero sum nor purely cooperative.
5. In these games the players choose their actions separately, but their links to others involve elements of both competition and cooperation.
6. The essence of a game is the interdependence of player strategies.
7. There are two distinct types of strategic interdependence: sequential and simultaneous.
8. In the former the players move in sequence, each aware of the others’ previous actions.
9. In the latter the players act at the same time, each ignorant of the others’ actions.

Examle :

Strategic moves. A player can use threats and promises to alter other players’ expectations of his future actions, and thereby induce them to take actions favorable to him or deter them from making moves that harm him. To succeed, the threats and promises must be credible. This is problematic because when the time comes, it is generally costly to carry out a threat or make good on a promise. Game theory studies several ways to enhance credibility. The general principle is that it can be in a player’s interest to reduce his own freedom of future action. By so doing, he removes his own temptation to renege on a promise or to forgive others’ transgressions.

If you have any query about Game theory or If you have some good definition to share must tell me :-) and You can also read Game Theory at http://en.wikipedia.org/wiki/Game_Theory

Take Care

Let us study about Perfect competition Today

PERFECT COMPETITION

"Perfect competition is a type of market characterized by

- a very large number of small producers or sellers,

- a standardized, homogeneous product,

- the inability of individual sellers to influence price,

- the free entry and exit of sellers in the market, and

- unnecessary nonprice actions."

Examples of markets in perfect competition are extremely rare. Numerous markets in the retail, service and agricultural sectors approach perfect competition best. But, in the agricultural sector, government support price programs distort the market mechanism. Not withstanding the lack of good examples, this form of market is important because of its

PERFECT COMPETITION NUMBER OF FIRMS

The very large number of firms in perfect competition implies that each individual firm is very small in comparison to the total market. Indeed, if one firm were to become significantly large, it would dominate the market and competition would be eliminated or at least diminished.

In the milk production segment of agriculture, farms are usuallysmall. They are especially small compared to the size of the entire market for milk. Note that the milk distributors are occasionally large, but not the productive farms.

PERFECT COMPETITION STANDARDIZED PRODUCT

The product in perfect competition is said to be standardized (or homogeneous). This means that it does not make any difference to customers which specific firm sells the product:
it is absolutely identical. This is the main distinction between perfect competition and monopolistic competition: once some differences can be recognized by customers, firms acquire
power over these customers.

Milk is a uniform and homogen eous product. It is not possible to make a distinction between the milk of one farm and another. The government has indeed set standards of quality, fat content and cleanliness.

PRICE TAKER

The firms in perfect competition have no power over price: they have to sell at the going market price. The firms in perfect competition are said to be price takers. Should a firm attempt to raise the price by the smallest possible amount, customers would not buy from it because they could buy the same product from other firms. Lowering the price is also not necessary because the firm can already sell all its output at the going price.

A milk producer who would try to raise his/her revenues by increasing the price for milk, would find the company collecting the milk in that region unwilling to buy his/her milk any longer. One individual farmer is thus unable to affect the price of milk in the entire market.

PERFECT

COMPETITION ENTRY AND EXIT

There are no barriers to entry to or exit from a market in perfect competition. This condition assures that no firm will dominate the market and evict other firms. It also assures that the number of firms (although changing) will remain large.

Agricultural production can start for most crops by simply planting on a parcel of land. For instance, that is true for fruit trees and vegetables. (It is true. however, that for some products such as milk or tobacco, the government limits production because of the existing overproduction).

PERFECT COMPETITION NONPRICE ACTION

Nonprice actions such as advertising, service after sale or warranty, are not necessary in perfect competition because the firm can already sell all its output at the going price, and incurring additional expense would only make it unprofitable. Nonprice action for the entire industry may however be useful

A single milk producer cannot possibly influence the consumption of milk at large, and needs not advertise. An association of milkproducers or a large milk distributor may, however, be in aposition to use advertisement effectively.

PERFECT COMPETITION DEMAND

The demand of firms in perfect competition is perfectly elastic (i.e., the smallest possible price change results in a virtually infinite quantity change). Such demand is represented graphically by a horizontal demand curve: no matter what quantity is sold, the price is the same, and it is the going price in the market.

Graph

Nationwide, the demand for milk is likely to be downsloping, that is inversely related to price. But for a single milk producer, it is given by the price the farmer can receive: the going market price. It does not change, no matter what quantity the farmer produces. Thus demand is horizontal.

PERFECT COMPETITION MARGINAL REVENUE

The horizontal demand curve is also the marginal revenue of a firm in perfect competition. The marginal revenue, or additional revenue from one more unit sold, is just equal to the going price (which is shown graphically by the demand curve itself). Note that the average revenue is also the demand curve and total revenue is an upsloping straight line.

PROFIT MAXIMIZATION

A firm must seek to sell a volume of output where its total revenue exceeds its total cost by the largest amount possible; that is, its profit is the maximum.

LOSS MINIMIZATION

If a firm fails to derive a profit, it may nevertheless seek, in the short run, to produce at that level of sales where the difference between its cost and its revenue, i.e., its loss, is minimum.

CLOSE DOWN DECISION

If a firm has revenues that are insufficient to cover even its fixed costs in the short run, the firm must close down.

BREAK-EVEN POINT

The volume of output where total revenue is equal to total cost is known as the break-even point. A firm must be beyond its break-even point in order to be maximizing its profit.

MARGINAL REVENUE MARGINAL COST RULE

Producing at the level of output where marginal revenue equals marginal cost is equivalent to profit maximization. Indeed, if one less unit were to be produced, profit would be smaller by the excess of marginal revenue over marginal cost for that last unit. If one more unit were to be produced, profit would also be smaller, this time by the excess of marginal cost over marginal revenue.

MARGINAL REVENUE MARGINAL COST

The marginal revenue = marginal cost rule is applicable to loss minimization as well as profit maximization. However, if marginal revenue intersects marginal cost below average variable cost, it means that revenues are not sufficient to cover fixed costs and the firm should close down.

MAXIMUM PROFIT

The maximum profit is obtained by first determining the level of output for which marginal revenue equals marginal cost (thus profits cannot possibly be increased). Then determining 1- total revenue given by price multiplied by quantity, 2- total cost given by average total cost multiplied by quantity, 3- the difference between 1 and 2 above is the profit (or loss).

MAXIMUM PROFIT GRAPH

Since maximum profit is the excess of total revenue over total cost, it is shown graphically as the area by which the total revenue rectangle exceeds the total cost rectangle. The height of total revenue rectangle is the price received by the firm, and the width is the optimum quantity (where MR=MC). The height of total cost rectangle is average total cost (on ATC curve), and the width is the optimum quantity.

Graph

SHORT RUN SUPPLY CURVE

The short run supply curve of firms in perfect competition is the upsloping portion of the marginal cost curve (above the average variable cost intersection). Indeed, a firm determines its optimum volume of sales by taking the intersection of marginal revenue and marginal cost. The marginal revenue is also the price it receives. Thus supplier's price-quantity combinations are given by the marginal cost upsloping portion.

LONG RUN PERFECT COMPETITION EQUILIBRIUM

The long run equilibrium for firms in perfect competition is where demand (and marginal revenue which is identical to it) is tangent to the minimum of average total cost (where marginal cost also intersects average total cost). At that point, there is no profit or loss for the firm. (Note that there is no pure or economic profit, but normal profit must still be covered).

ENTRY OF FIRMS IN PERFECT COMPETITION

Should demand be above the minimum of average total cost, pure profit would exist for firms in perfect competition. This profit would attract new firms to the industry. Such entry of new firms is not impeded by any entry barriers in industries in perfect competition. The new firms would increase the total market supply and drive the price down. The lower price pushes the demand for each firm down toward or even below the equilibrium minimum average total cost point.

EXIT OF FIRMS IN PERFECT COMPETITION

Should the demand be below the minimum of average total cost, losses of firms would force some firms to leave the industry. As firms leave, a decreasing total supply pushes price back up. The increasing price lifts the demand curves for individual firms upward toward or even above the equilibrium point. Firms departure or entry will continue until the price settles to be just equal to minimum average cost.

LONG RUN SUPPLY CURVE

The long run supply curve for an industry in perfect competition is perfectly elastic (that is horizontal) in constant-cost industries and upsloping in increasing-cost industries. Whether an industry is constant-cost or increasing-cost is determined by
the presence of adequate or insufficient resources.

PERFECT COMPETITION ECONOMIC EFFECT

Perfect competition is seen as an ideal or optimum form of market because of its very beneficial economic effect for society, which comes from
- allocative efficiency, and- productive efficiency.
But there are a few shortcomings nevertheless.

PRODUCTIVE EFFICIENCY

The productive efficiency of perfect competition can be observed in the long run equilibrium point of all firms in the industry, which is at the minimum of average total cost. This means that
all firms are forced to cut their costs and utilize the best available technology in order to have their minimum average total cost no higher than that of all the other firms in the industry. There is also no under or over utilized capacity.

ALLOCATIVE EFFICIENCY

The allocative efficiency in perfect competition comes from the fact that the quantity produced by each firm is just that for which the price paid by society is equal to the cost of additional resources (marginal cost). More could not possibly be obtained for a lower price. The resources are also the most efficiently allocated among industries since firms will bid for these resources up to the price consumers want to pay for them.

PERFECT COMPETITION SHORTCOMINGS

In spite of its beneficial economic effect, perfect competition fails to
- provide any correction for income distribution inequity,
- generate any public goods since there is not profit,
- stimulate technological progress because of lack of profits,
- offer diversity in products since these are standardized.

What is a bussiness Cycle? What are its stages?

Definition: A business cycle is the periods of growth and decline in an economy.

A business cycle is not a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock. Its timing is random and, to a large degrees, unpredictable. A business cycle is identified as a sequence of four phases:

• Contraction (A slowdown in the pace of economic activity)

• Trough (The lower turning point of a business cycle, where a contraction turns into an expansion)

• Expansion (A speedup in the pace of economic activity)

• Peak (The upper turning of a business cycle)

A recession occurs if a contraction is severe enough... A deep trough is called a slump or a depression.

There are four stages in the business cycle:

1. Contraction - When the economy starts slowing down.
2. Trough - When the economy hits bottom, and generally stagnates at a low level.
3. Expansion - When the economy starts growing again.
4. Peak - When the economy is in a state of "irrational exuberance."

http://economics.about.com

What is Dumping?

Dumping is a discrimination of markets using different prices. There are various types of dumping, but we will investigate the most problematic one: persistent dumping. If a firm has a protected domesitc market, it will behave as a monopolist in the market, and a competitor in the world market. When it sells one more unit, it will compare MR from the domestic market and the world market, and choose the higher. We show the domestic MR as MR [1] and the world market MR as MRW that is the same as the world price PW. [2] Now MR > MRW up to the point G. [3] Therefore, it will sell Q4 units in the domestic market [4] with a price of P'd. [5] After that point, it will sell the good in the world market up to the point F where MRW=MC. [6] Thus it exports Q2 - Q4. [7]

Domestic consumer surplus: Autarky APdB [1] Free trade APWE [2] Dumping AP'dH [3] Domestic producer surplus: Autarky CPdBI [4] Free trade CPWF [5] Dumping CP'dHK+KGF [6]

Compared to free trade, by dumping, the domestic net loss is HGE

What Does Microeconomics Mean? What Does Macroeconomics Mean? What's the difference between macroeconomics and microeconomics?

Microeconomics,
The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households. It is concerned with the interaction between individual buyers and sellers and the factors that influence the choices made by buyers and sellers. In particular, microeconomics focuses on patterns of supply and demand and the determination of price and output in individual markets (e.g. coffee industry).

The field of economics is broken down into two distinct areas of study: microeconomics and macroeconomics. Microeconomics looks at the smaller picture and focuses more on basic theories of supply and demand and how individual businesses decide how much of something to produce and how much to charge for it. People who have any desire to start their own business or who want to learn the rationale behind the pricing of particular products and services would be more interested in this area.


Macroeconomics,
on the other hand, looks at the big picture (hence "macro"). It focuses on the national economy as a whole and provides a basic knowledge of how things work in the business world. For example, people who study this branch of economics would be able to interpret the latest Gross Domestic Product figures or explain why a 6% rate of unemployment is not necessarily a bad thing. Thus, for an overall perspective of how the entire economy works, you need to have an understanding of economics at both the micro and macro levels.

The field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels.

Macroeconomics is focused on the movement and trends in the economy as a whole, while in microeconomics the focus is placed on factors that affect the decisions made by firms and individuals. The factors that are studied by macro and micro will often influence each other, such as the current level of unemployment in the economy as a whole will affect the supply of workers which an oil company can hire from, for example.

Difference:

Macro- and microeconomics, and their wide array of underlying concepts, have been the subject of a great deal of writings. The field of study is vast; here is a brief summary of what each covers:

Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. For example, microeconomics would look at how a specific company could maximize it's production and capacity so it could lower prices and better compete in its industry. (Find out more about microeconomics in Understanding Microeconomics.)

Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate. (To keep reading on this subject, see Macroeconomic Analysis.)

While these two studies of economics appear to be different, they are actually interdependent and complement one another since there are many overlapping issues between the two fields. For example, increased inflation (macro effect) would cause the price of raw materials to increase for companies and in turn affect the end product's price charged to the public.

The bottom line is that microeconomics takes a bottoms-up approach to analyzing the economy while macroeconomics takes a top-down approach. Regardless, both micro- and macroeconomics provide fundamental tools for any finance professional and should be studied together in order to fully understand how companies operate and earn revenues and thus, how an entire economy is managed and sustained.