Microeconomics & Game Theory (The Art of Agent-Based Modeling)

Transcription

1 GUtech Florian Rupp Microeconomics & Game Theory (The Art of Agent-Based Modeling) Introduction & Scope Winter Term 2016/ 17 Prof. Dr. Florian H.-H. Rupp German University of Technology in Oman (GUtech) Department of Mathematics and Science

2 What is Microeconomics? and now?

3 What is Microeconomics? Economics can be distinguished from other social sciences by the belief that most (all?) behavior can be explained by assuming that rational agents with stable well defined preferences interact in markets that (eventually) clear. An empirical result qualifies as an anomaly if it is difficult to rationalize or if implausible assumptions are necessary to explain it within the paradigm. (Thaler, 2001) economy agent rational choice desires preferences actions

4 Economics is about the actions of optimizing individuals or individually rational agents/ players

5 Economics is about the actions of optimizing individuals or individually rational agents/ players

6 and the interactions between them

7 What is this course all about? Agenda Microeconomics A first Case Study What is Microeconomics? What is Macroeconomics? How will the Lecture, Homework Assignments and Tutorials Work?

8 Let us take the example of water policy Dance your PhD: Florence Metz (2015) about 10 minutes

9 The setting is based on a conflict of interests about the use of a limited common good veto players players with similar interests form coalitions brokers mediate between the coalitions

10 To predict the outcome of the game what do we need to know? To predict the outcome and maybe influence it we need to know the answers to the following questions? Who are the players? What are their preferences and how do they judge possible outcomes? What are the possible strategies of the players? Do the players act simultaneously or consecutively? Are the players negotiating with each other or make decisions autonomously? Recall, we assume that the players are individually rational, i.e. they are only optimizing their own profit. Can this lead to situations that are good for everyone?

11 What is this course all about? Agenda Microeconomics A first Case Study What is Microeconomics? What is Macroeconomics? How will the Lecture, Homework Assignments and Tutorials Work?

12 Microeconomics studies the behavior of individuals and small organizations in making decisions on allocating limited resources Microeconomics (from Greek prefix mikro- meaning small and economics) is a branch of economics that studies the behavior of individuals and small impacting organizations in making decisions on the allocation of limited resources. Typically, it applies to markets where goods or services are bought and sold. Microeconomics examines how these decisions and behaviors affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the quantity supplied and quantity demanded of goods and services. This is in contrast to macroeconomics, which involves the sum total of economic activity, dealing with the issues of growth, inflation, and unemployment (we will come to that later).

13 Microeconomics strives to analyze market mechanisms from the point of view of individual agents (bottom-up view) One of the goals of microeconomics is to analyze market mechanisms that establish relative prices amongst goods and services and allocation of limited resources amongst many alternative uses. Microeconomics analyzes market failure, where markets fail to produce efficient results, and describes the theoretical conditions needed for perfect competition. Significant fields of study in microeconomics include general equilibrium, markets under asymmetric information, choice under uncertainty and economic applications of game theory. In particular the economic applications of game theory will be main focus of this course as they allow us to identify lines of behavior on the individual agent level.

14 As a second influencing factor, we will discuss demand & supply (in a nutshell) The theory of supply and demand usually assumes that markets are perfectly competitive. This implies that there are many buyers and sellers in the market and none of them have the capacity to significantly influence prices of goods and services. The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). The graph depicts a right-shift in demand from D 1 to D 2 along with the consequent increase in price and quantity required to reach a new market-clearing equilibrium point on the supply curve (S). In many real-life transactions, the assumption fails because some individual buyers or sellers have the ability to influence prices. Quite often, a sophisticated analysis is required to understand the demand-supply equation of a good model. However, the theory works well in situations meeting these assumptions.

15 A simple situation of an equilibrium between supply and demand

16 The demand of food is one fish per day and the supply is one fish per day

17 hence an equilibrium is reached each and every day

18 but of course there are more factors that influence an economy

19 Microeconomics is a very large field of study such that this introductory course can only serve as an orientation The study of microeconomics involves several key areas: Demand, supply, and equilibrium Measurement of elasticities Consumer demand theory Theory of production Costs of production Competition & Monopoly Market structure Game theory Labour economics Welfare economics Economics of information Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers resulting in an economic equilibrium for price and quantity.

20 Microeconomics is a very large field of study such that this introductory course can only serve as an orientation The study of microeconomics involves several key areas: Demand, supply, and equilibrium Measurement of elasticities Consumer demand theory Theory of production Costs of production Competition & Monopoly Market structure Game theory Labour economics Welfare economics Economics of information Elasticity is the measurement of how responsive an economic variable is to a change in another variable. Elasticity can be quantified as the ratio of the percentage change in one variable to the percentage change in another variable, when the latter variable has a causal influence on the former. Frequently used elasticities include price elasticity of demand, price elasticity of supply, income elasticity of demand, or elasticity of substitution between factors of production.

21 Microeconomics is a very large field of study such that this introductory course can only serve as an orientation The study of microeconomics involves several key areas: Demand, supply, and equilibrium Measurement of elasticities Consumer demand theory Theory of production Costs of production Competition & Monopoly Market structure Game theory Labour economics Welfare economics Economics of information Consumer demand theory relates preferences for the consumption of both goods and services to the consumption expenditures. Ultimately, this relationship between preferences and consumption expenditures is used to relate preferences to consumer demand curves. The link between personal preferences, consumption and the demand curve is one of the most closely studied relations in economics. It is a way of analyzing how consumers may achieve equilibrium between preferences and expenditures by maximizing utility subject to consumer budget constraints.

22 Microeconomics is a very large field of study such that this introductory course can only serve as an orientation The study of microeconomics involves several key areas: Demand, supply, and equilibrium Measurement of elasticities Consumer demand theory Theory of production Costs of production Competition & Monopoly Market structure Game theory Labour economics Welfare economics Economics of information Production theory is the study of production, or the economic process of converting inputs into outputs. Production uses resources to create a good or service that is suitable for use, gift-giving in a gift economy, or exchange in a market economy. This can include manufacturing, storing, shipping/ logistics, and packaging. Some economists define production broadly as all economic activity other than consumption. They see every commercial activity other than the final purchase as some form of production.

23 Microeconomics is a very large field of study such that this introductory course can only serve as an orientation The study of microeconomics involves several key areas: Demand, supply, and equilibrium Measurement of elasticities Consumer demand theory Theory of production Costs of production Competition & Monopoly Market structure Game theory Labour economics Welfare economics Economics of information The cost-of-production theory of value is the price of an object or condition is determined by the sum of the cost of the resources that went into making it. The cost can comprise any of the factors of production: labor, capital, land. Technology can be viewed either as a form of fixed capital (like a plant) or circulating capital (like intermediate goods).

24 Microeconomics is a very large field of study such that this introductory course can only serve as an orientation The study of microeconomics involves several key areas: Demand, supply, and equilibrium Measurement of elasticities Consumer demand theory Theory of production Costs of production Competition & Monopoly Market structure Game theory Labour economics Welfare economics Economics of information Perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product, like Ebay. A monopoly (from Greek monos μόνος (alone or single) + polein πωλεῖν (to sell)) exists when a single company is the only supplier of a particular commodity. An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Oligopolies can result from various forms of coalitions which reduce competition and lead to higher costs for consumers.

25 Microeconomics is a very large field of study such that this introductory course can only serve as an orientation The study of microeconomics involves several key areas: Demand, supply, and equilibrium Measurement of elasticities Consumer demand theory Theory of production Costs of production Competition & Monopoly Market structure Game theory Labour economics Welfare economics Economics of information The market structure can have several types of interacting market systems, like competitive markets, monopolies, etc. from both the seller as well as from the buyer side. Examples of markets include but are not limited to: commodity markets, insurance markets, bond markets, energy markets, stock markets, online auctions, media exchange markets, real estate market

26 Quiz 1. The food market in Oman is a a) monopoly b) duopoly (only two major players) c) oligopoly d) market with perfect competition 2. A souk like in Mathra is an example for a a) monopoly b) a market where all sellers have perfect/ complete information about the purchasing prizes or manufacturing costs c) a market where all buyers have perfect/ complete information about the purchasing prizes or manufacturing costs d) a market where prices are dictated by the government

27 Microeconomics is a very large field of study such that this introductory course can only serve as an orientation The study of microeconomics involves several key areas: Demand, supply, and equilibrium Measurement of elasticities Consumer demand theory Theory of production Costs of production Competition & Monopoly Market structure Game theory Labour economics Welfare economics Economics of information Game theory is a major method used in mathematical economics and business for modeling competing behaviors of interacting agents. Applications include a wide array of economic phenomena and approaches, such as auctions, bargaining, mergers & acquisitions pricing, fair division, duopolies, oligopolies, social network formation, agent-based computational economics, general equilibrium, mechanism design, and voting systems, and across such broad areas as experimental economics, behavioral economics, information economics, industrial organization, and political economy.

28 Microeconomics is a very large field of study such that this introductory course can only serve as an orientation The study of microeconomics involves several key areas: Demand, supply, and equilibrium Measurement of elasticities Consumer demand theory Theory of production Costs of production Competition & Monopoly Market structure Game theory Labour economics Welfare economics Economics of information Labour economics seeks to understand the functioning and dynamics of the markets for wage labour. Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers), the demands of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and income.

29 Microeconomics is a very large field of study such that this introductory course can only serve as an orientation The study of microeconomics involves several key areas: Demand, supply, and equilibrium Measurement of elasticities Consumer demand theory Theory of production Costs of production Competition & Monopoly Market structure Game theory Labour economics Welfare economics Economics of information Welfare economics is a branch of economics that uses microeconomic techniques to evaluate well-being from allocation of productive factors as to desirability and economic efficiency within an economy, often relative to competitive general equilibrium. It analyzes social welfare, however measured, in terms of economic activities of the individuals that compose the theoretical society considered. Accordingly, individuals, with associated economic activities, are the basic units for aggregating to social welfare, and there is no social welfare apart from the welfare associated with its individual units.

30 Microeconomics is a very large field of study such that this introductory course can only serve as an orientation The study of microeconomics involves several key areas: Demand, supply, and equilibrium Measurement of elasticities Consumer demand theory Theory of production Costs of production Competition & Monopoly Market structure Game theory Labour economics Welfare economics Economics of information Information economics or the economics of information is a branch of microeconomic theory that studies how information and information systems affect an economy and economic decisions. Information has special characteristics: it is easy to create but hard to trust, it is easy to spread but hard to control, and it influences many decisions. These special characteristics (as compared with other types of goods) complicate many standard economic theories.

31 Why is microeconomics important? It tells us how millions of consumers and produces take decisions about the allocation of productive resources among millions of goods and services It explains how through market mechanisms goods and services produced in the community are distributed It also explains the determination of the relative prices of the various productive services It explains the conditions of efficiency both in consumption and production and departure from the optimum Microeconomics helps in the formulation of economic policies calculated to promote efficiency in the production of welfare of the masses

32 What is this course all about? Agenda Microeconomics A first Case Study What is Microeconomics? What is Macroeconomics? How will the Lecture, Homework Assignments and Tutorials Work?

33 Macroeconomics deals with the whole of an economy rather than with individual markets, Macroeconomics (from the Greek prefix makro- meaning large and economics) is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets. This includes national, regional, and global economies.

34 it studies aggregated indicators to explain relationships between key factors of whole economies Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indexes to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. Again, in contrast, microeconomics is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets.

35 Let s discuss an example: What happens if the unemployment goes down?

36 Microeconomics vs. Macroeconomics: a first simplified comparison Microeconomics is the study of economic behavior of decision makers (agents). Macroeconomics is the study of the behavior of entire economies.

37 Unfortunately, macro-economics is currently much more influenced by trends and schools than micro-economics

38 What is this course all about? Agenda Microeconomics A first Case Study What is Microeconomics? What is Macroeconomics? How will the Lecture, Homework Assignments and Tutorials Work? cf. welcome letter

39 The lecture blends classical topics from Game Theory, the Theory of Choice and from the Theory of Supply and Demand Game Theory Theory of Choice Preference Relations Management & Game Theory Prisoner s Dilemma & Simulating Societies Nash Equilibrium The Theory of Choice Sequential Form & Subgame Perfectness Trembling Hand Perfect Equilibrium Consumer Preferences Mixed Strategies, Maximin Solutions & Zero-Sum Games Consumer Choice Market Structures Supply & Demand Theory Demand & Supply Equilibrium Prices Changes in the Market Environment Policy Interventions

40 You are expected to err and ask stupid questions Note, An expert is someone who has made all the mistakes which can be made, in a narrow field. (N. BOHR) Thus, do your errors early and don t be afraid to ask seemingly stupid questions. During the lectures there is enough time for everyone! At the end of the course you ll be an expert in Microeconomics

41 Microeconomics is no spectators sport I really encourage you to actively participate in class, and actively prepare for the next class.. Of course, you are allowed to cooperate with your class mates. Slide show lectures can become rather exhaustive. Taking notes will help you stay alert and grasp the key messages more easily. Things you may want to jot down: section titles definitions, theorems, rules of thumb key messages classroom exercises everything else you find interesting

42 How the first lectures may feel like We expect from you that you are responsible for your success, this includes that for each lecture hour you will have to work two hours at home to re-study the lecture, to do the exercises (incl. pre-learning) and to do the homework assignments.

43 For communication within the class we will use the Q&A platform piazza (all notes will be placed there as well)

44 Our course will be interactive focusing on hands-on case studies based on Game Theory Lite Economics lives by the tangible example. Therefore, we will dedicate a large amount of our time on such case studies. The source for them is Game Theory Lite A Book Full of Problems The structure of our course will be such that first the fundamental definitions and tools will be clarified, and we then jump into one of the example problems and follow the outline of the solution. In particular, this gives you the chance to present very early in your academic career and learn to bring your point forward in discussions. Further reading: S. Bowles (2004): Microeconomics Behavior, Institutions, and Evolution, Princeton University Press D.A. Besanko & R.R. Braeutigam (2002): Microeconomics, 4 th edition, Wiley

45 Mandatory and further reading D.A. Besanko & R.R. Braeutigam (2002): Microeconomics, 4 th edition, Wiley S. Bowles (2004): Microeconomics Behavior, Institutions, and Evolution, Princeton University Press P. Krugman, R. Wells & K. Graddy (2011): Essetials of Economics, 2 nd edition, Worth Publishers M. Leroch, N. Maaser & F. Rupp (2013): Game Theory Lite A Book Full of Problems, Accedo M.C. Lovell (2004): Economics with Calculus, Word Scientific A. Rubinstein (2012): Lecture Notes in Microeconomic Theory The Economic Agent, 2 nd edition, Princeton University Press A.D. Taylor & A.M. Pacelli (2008): Mathematics and Politics Strategy, Voting, Power and Proof, 2 nd edition, Springer

46 GUtech Florian Rupp See you next time Questions or Comments? Florian Rupp