The game theory was created back in the 1940's as way to scientifically calculate the possible outcomes in game play taking into consideration the moves of the other participants. Since its development it has been used in a wide range of applications, including economics, philosophy, and political science, to name a few. The idea behind the game theory is that one can choose the best possible outcome for himself, taking into consideration the decisions that his opponents might make. Using the game theory in economics one can create a payoff matrix, which consists of creating a table of outcomes based on different possible outcomes that would result from each decision made. From this matrix all possible outcomes would be displayed so that the "player" can make the best possible decision based on the best possible decisions that his opponent could make. Given this information one can see the best possible solution that his or her opponent can make and then they can be ready to decide the best possble solution given what his oppenent will do.
When two or more parties decide to work together for the best interests of those involved they may decided to "collude" with each other, thus forming a cartel. Each party would then decide how to divide and share the benefits of working together. However each party involved may decide not to stick to the agreement. In that decision they may use the payoff matrix to show the possible outcomes given that the other parties may not decide to stick to the agreement. With this information given, it makes me wonder though, why they would decide to work together if, according to economists, that the parties involved will just end breaching the agreement anyway?
Friday 9 December 2011
Wednesday 7 December 2011
Starbucks Restructures
It seems as though has Starbucks had pushed for too much growth around the time of the most recent recession. After only being open for months many of these newly opened stores are being closed down due to unprofitability. Starbucks has tried to grow too big, too fast, and right on the brink of an impending recession. They needed to majorly scale back operations in order to support a long run growth. The company most likely found itself experiencing diseconomies of scale and therefore needed to cut back operations in order to support its short run costs. This would allow them to remain open for the short run and expand in the long run.
The coffee industry is an excellent example of a perfectly competitec market. Buyers and sellers are all small in comparison to the industry. It won't make a big deal in the market if I buy coffee from them, the corner store, or make it at home. One could however argue that preference is given to which coffee one purchases. In my opinion I prefer Tim Horton's and find Starbucks to be far too expensive. If Starbucks were to lower their price, they would lower their supply, but the demand would increase. Unless the company expanded, so as to lower their costs, then they could increase their supply again to meet the increased demand.
The graph shows that a lower price would lead to an increased demand and a lower supply. The company would certainly need to be able to expand, experiencing economies of scale of course, to be able to meet up with this new demand.
The coffee industry is an excellent example of a perfectly competitec market. Buyers and sellers are all small in comparison to the industry. It won't make a big deal in the market if I buy coffee from them, the corner store, or make it at home. One could however argue that preference is given to which coffee one purchases. In my opinion I prefer Tim Horton's and find Starbucks to be far too expensive. If Starbucks were to lower their price, they would lower their supply, but the demand would increase. Unless the company expanded, so as to lower their costs, then they could increase their supply again to meet the increased demand.
Sunday 4 December 2011
The Law of Dimishing Tobacco Sales
Piere Lemieux's article on the law of diminishing returns for the tobacco industry made some very interesting points. I think the best point to show the diminishing return on tobacco intervention is the point that states, most of the easily persuaded people have already quit from the success of the campaign. The people that are left still smoking are going to be the harder ones to break. This means the government will need to keep spending more money on and make less and less change. The point following about how too much information may be less effective also helps the drive his point home. After so much information is given it would just be ignored, they get the point. I remember when the mandatory 30% labels came out on the cigarette packages and for the first few months I bet they did slow down some smokers, but for the most part people just started to look past them, all they wanted was a cigarette! He also stated in Quebec they just made covers for their packs.
I think Lemieux has made some excellent points, with much truth behind them. I think however that he might be a bit far off when he says that one study shows “most smokers overestimate the risks of smoking”. I think if people know the outcome of smoking and continue to do so only to find out in 30-40 years that they now have lung disease or worse, they gave it to their spouse, they do not overestimate the risks of smoking.
I think the government reached the point of diminishing returns probably only a few years ago. You could see the different ads for their anti-smoking campaigns changing and becoming more and more. In the ads now they are targeting younger smokers in hopes to get them to quit before they even get started. They are aiming straight at the hearts of the youths, right at their video games. The newest ads are asking which one these teens want to spend their money on.
As for the supply and demand side of the tobacco companies, the warnings on the tobacco packaging have had some success. As it states, sales are dropping. This means that the demand for cigarettes has decreased. As the demand decreases, this leaves a surplus of cigarettes, which should drive the prices down, however the drop in sales is leading tobacco companies toward higher costs of producing for the lower demand.
On the other side of the governments debate for this subject is the taxes that are collected on these “sin” products. Along with the lower demand for these products, the amount taxes collected for them will decrease along with sales. And the more governments are successful, the less in taxes will be collected.
I think Lemieux has made some excellent points, with much truth behind them. I think however that he might be a bit far off when he says that one study shows “most smokers overestimate the risks of smoking”. I think if people know the outcome of smoking and continue to do so only to find out in 30-40 years that they now have lung disease or worse, they gave it to their spouse, they do not overestimate the risks of smoking.
I think the government reached the point of diminishing returns probably only a few years ago. You could see the different ads for their anti-smoking campaigns changing and becoming more and more. In the ads now they are targeting younger smokers in hopes to get them to quit before they even get started. They are aiming straight at the hearts of the youths, right at their video games. The newest ads are asking which one these teens want to spend their money on.
As for the supply and demand side of the tobacco companies, the warnings on the tobacco packaging have had some success. As it states, sales are dropping. This means that the demand for cigarettes has decreased. As the demand decreases, this leaves a surplus of cigarettes, which should drive the prices down, however the drop in sales is leading tobacco companies toward higher costs of producing for the lower demand.
On the other side of the governments debate for this subject is the taxes that are collected on these “sin” products. Along with the lower demand for these products, the amount taxes collected for them will decrease along with sales. And the more governments are successful, the less in taxes will be collected.
Monday 21 November 2011
Change in Price Won't Change Demand For America's Favourite: The Big Mac
According to an article in the Vancouver Sun, a tax on sugary sodas and fatty burgers will do little to change the demand for these unhealthy items. The article explains in the state of California and many other places in the states, they have started placing sales taxes on sugary sodas in the hopes that this will discourage consumers from buying these unhealthy drinks. Apparently these extra taxes have not curbed the spending on such indulgements. They also went on to show how uneffective a tax such as this is by using a comparison to american favourite sandwhich, the Big Mac. The document went on to say that despite modest increases of 10 to 20 cents over the years, the demand for this ever popular sandwich remains relatively constant. They use the comparison to this burger to show that the demand for these unhealthy items is quite inelastic. They also go on to show that even though the demand in inelastic, people will still find substitutes. For example if the price of sodas with a new tax imposed increases, people may well start buying "cheaper, sweeter alternatives". The author also explains that if they were to impose a tax on say the Big Mac, they would have to impose the tax on all foods with such a high calorie intake. This would mean taxing foods in many types of restaraunts. In conclusion, they stated that they would need to look into providing a positive reinforcement by subsidizing healthier options, and giving people incentives through health insurance plans.
Taken from The soda tax fallacy; Levies on sugary drinks unlikely to change consumer behaviour; healthy diet incentives have more power (2011). Vancouver Sun. Article's URL: http://proquest
Wednesday 16 November 2011
Let's Demand a Change
Many circumstances may change to cause a change in demand. We may desire a newer technology than previously available, or we may be able to afford this newer technology. Related products may change in price causing us to either purchase more or less of something. Or we may expect prices to change in the future causing us to buy now! Whatever the reason, as our demand changes, the prices of products and thereafter the supply of those products will change.
In my personal career, when expecting a raise at work, I can remember increasing my spending in anticipation of having a higher income. Although I soon learned that is not the best idea. A better idea would have probably been saving, but live and learn I guess.
In my personal career, when expecting a raise at work, I can remember increasing my spending in anticipation of having a higher income. Although I soon learned that is not the best idea. A better idea would have probably been saving, but live and learn I guess.
Tuesday 25 October 2011
Economic Games
Demand and supply are what drives our market. You can get a pretty good idea of how demand and supply affect the prices of goods and services after playing some of these online games. I played the McVideo game and the farmers game to get a better understanding of these market driving forces.
The McVideo game was definitely entertaining, but I don't think it painted as good of a picture as some of the other games. While it did give a good idea of demand and supply, it was very fast paced and a little harder to get the hang of. You could fail at it very quickly. Although once you get the hang of it you can see how you would need to manage supply based on demand and vice versa. I did however find that it was much easier to manage an increase in the demand, so long as you have the supply to cover it. It's a lot harder to increase the supply for the demand after the fact.
In contrast, the farming game was quite a bit different. It made you think a lot more, and gave you the time to do it. ;) It also made you watch your costs and decide where the best place was to sell your goods. You learn quickly to invest as much as you can in land first, as it goes quickly and the price goes up quickly because of the high demand for it. And without the land you could not make money as you needed it to grow your cattle and your grains. Then you need to keep an eye on the local market and the foreign market to get the best price available for your goods.
All in all they were pretty neat games and each game had its own lessons to be learned. I am glad I played 2 of them to give different perspectives of demand and supply.
The McVideo game was definitely entertaining, but I don't think it painted as good of a picture as some of the other games. While it did give a good idea of demand and supply, it was very fast paced and a little harder to get the hang of. You could fail at it very quickly. Although once you get the hang of it you can see how you would need to manage supply based on demand and vice versa. I did however find that it was much easier to manage an increase in the demand, so long as you have the supply to cover it. It's a lot harder to increase the supply for the demand after the fact.
In contrast, the farming game was quite a bit different. It made you think a lot more, and gave you the time to do it. ;) It also made you watch your costs and decide where the best place was to sell your goods. You learn quickly to invest as much as you can in land first, as it goes quickly and the price goes up quickly because of the high demand for it. And without the land you could not make money as you needed it to grow your cattle and your grains. Then you need to keep an eye on the local market and the foreign market to get the best price available for your goods.
All in all they were pretty neat games and each game had its own lessons to be learned. I am glad I played 2 of them to give different perspectives of demand and supply.
Friday 23 September 2011
The Curve of Life: Possibilities of Production
Two years ago I made the decision to go back to school. Best decision I could make at the time, but at what cost? At that time I thought I could work part time and go to school part time, and run our family business part time, and take care of the kids full time. I did not realize however, that my opportunity cost was going to be the school work. I have since then had to make choices to ensure that my school work was not sacrificed along with the other number 1 item on my list: my family! I have since then, quit the part-time job, lowered my involvement in the family business (as much as possible :) ) and tried to manage my time better (which is easier said than done!). My possibilities curve would have to a 3D cubic graph to properly represent my situation. Lol.
The possibilities graph is however not 3D, and is used to simplify the understanding of opportunity costs, scarcity, and maximum output given that society is fully employed. Economists use the possibilities curve to show us the various mixes of output that can be attained for certain items. It also gives a visual representation proving that our resources are scarce. If we decided to make more of one item, it will mean the sacrifice of making less of something else. I have never seen these graphs before, but I do think they really help drive home the point that our resources are scarce, what will happen when we make different choices, and what the cost of those choices will be.
The possibilities graph is however not 3D, and is used to simplify the understanding of opportunity costs, scarcity, and maximum output given that society is fully employed. Economists use the possibilities curve to show us the various mixes of output that can be attained for certain items. It also gives a visual representation proving that our resources are scarce. If we decided to make more of one item, it will mean the sacrifice of making less of something else. I have never seen these graphs before, but I do think they really help drive home the point that our resources are scarce, what will happen when we make different choices, and what the cost of those choices will be.
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