The Game Theory

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?

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 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.