Welcome back to my blog! Last time we talked about Pareto efficiency, which defined as it is impossible to make one party better off without making someone worse off. This time, we will begin with the introduce ‘game theory’, which is a concept that have somewhat similarity with Pareto efficiency.

Game theory is a theoretical framework for conceiving social situations among competing players. One of the famous concept is prisoner’s dilemma. What does that mean?

An example will be helpful to answer that question.

If A and B have done something bad, and been put into the prison. The policeman give them three choices. The first one:  If A confess B’s criminal evidence, A will get a reduce of penalty from nine years to two year, and B will stay in the prison for ten years. the second one: If B confess A’s criminal evidence, B will get a reduce of penalty from nine years to two years, and A will stay in the prison for ten years. The third one: If both A and B do not betray each other, both of them will get the penalty of five years. They have no idea about what others might choice, because they have been separated into different rooms during making the decision. If both of them confess others criminal evidence, they will both have ten years penalty. The graph below is helpful to explain this condition.

This is when prisoner’s dilemma happened. The most possible outcome is that both of them confessed their crime, because they want to get reduction of penalty. This concept will be more related to oligopoly, which is a type of market system that will be covered in later blog.

After the introduction of game theory, we will go through the fundamental concept for economic activities— demand and supply.

What id demand? It defined as an economic principle referring to a consumer’s desire to purchase goods and services and willingness to pay a price for a specific good or service. The graph for demand curve normally have a downward trend, which means that as the price of this good or service increases, the quantity demand will decrease. When people analysis demand, it crucial to distinguish quantity demand and demand.

The main difference between them is quantity demand will only change with the price change, but the demand will never change with change only in price, moreover, the change in quantity demand will show on the graph as a point change on the curve, but change in demand will show as the shift of the entire curve.

If change in quantity will only caused by the change in price, what will cause the change in demand?

Firstly, changes in consumer income. if consumer income increase, demand will increase, which show as an outward shift curve. vice versa

Secondly, change in consumer tastes&preferences, the decrease or increase in demand will depend on different situation.

Thirdly, change in expectation. If consumer expect future price to rise, they will buy the product now, thus the demand increases. Vice versa.

There still have three other factors which will change demand, we will find that out in next blog!