Category: LPsection

In this LP, the second of our series on Risk and Uncertainty, we'll learn a bit more about risk, but also about uncertainty. We'll start by seeing again how risk is analysed using Morgenstern and von Neumann's expected utility theory. We'll also learn about alternative approaches, such as the Friedman-Savage and Markowitz perspectives, but especially Daniel Kahneman's prospect theory. We'll end our study of risk and uncertainty by learning how game theory can help when analysing uncertainty. Her...

Everyone has to make decisions, every day. However, it is not always clear to us what outcomes can derive from these decisions. When this happens, we say we are making decisions in situations under risk or uncertainty. When risk appears, although we are not sure about the possible outcomes of a given decision, we do know the probability of each outcome, while in situations under uncertainty we are not capable of making such assumptions. In this Learning Path we'll learn bout risk and uncertainty...

In our previous Learning Path, we learned the basics about Information economics. We saw what adverse selection and moral hazard are, using as en example the healthcare insurance market. Of course, insurance companies have ways of getting around adverse selection and moral hazard to a certain extent. But an insurance company is never going to be able to segment their policies fully: when was the last time you were asked about your driving style when subscribing to a dental plan? And most sane pe...

Information economics, also known as economics of information, is the study of how different degrees of information affect economic analysis. Since it's usually studied as a part of microeconomic theory, information economics mainly deal with micro problems, although it is easy to see examples in our own life: why should I study a college degree? Should I look for a job with a fixed salary or should I go for incentives-based salaries? If I quit smoking, drinking or driving, should I stop paying ...

In game theory, games are usually classified under two categories: simultaneous games and sequential games. Although simultaneous games make up for a lot of the research made during the early years of game theory, sequential games represent a closer step when modeling economic reality. Consider for instance a firm thinking about entering a new market, dominated by a monopoly. The new firm must take into account that its move (entering or not) will affect the monopolist decisions. Since both acti...

In this LP, the second of our series on Game theory, we'll learn everything there is about simultaneous games. These games, used when considering a game where players move or play their strategies simultaneously, are commonly used in many fields. From military strategies to collusion agreements, the analysis of these situations as simultaneous games can help us discover the best way to act. Finding Nash equilibria or knowing how to proceed to eliminate dominated strategies will get us the best o...

Game theory is a fascinating part of micro, and macro, economics. It’s based on the psychological current that underpins all Economics, and simplifies the main economic problem: optimising the use of limited resources; into a series of sets of events that illustrate how this problem drives human interaction. The aim of game theory is to take simple situations as allegories of the much more complex social and economic interaction that takes place every day to explain anything from price wars to a...

On our final Learning Path of our series on cost analysis, we’ll learn about cost efficiency, how to reduce costs while maintaining volume and quality. Therefore (and starting with economies of scale, as a link to last week’s LP), we could ask ourselves the following questions: will my costs fall if I produce more? Or if I produce a wider portfolio? Or what is the role training and specialisation can play in increasing efficiency? After understanding how cost efficiency can be achieved, we turn ...

Having covered the basics of cost analysis, we are in a position to explore other important aspects of cost efficiency. For example, will my costs fall if I produce more? As economies near perfection, costs efficiency becomes increasingly crucial, so much so that investment plays a greater role. But just how and where that investment in cost management should be directed is the subject of our second LP on cost analysis. In this LP, we’ll start where we left in our previous LP: Short run cost ana...

Two things determine profits: income, or turnover (the price at which we sell something) and costs (how much we spent making what we sell).  Therefore, knowing how much our costs are going to be is essential when planning the viability of a business, especially given that in a perfect economy, price is not determined by us but by what the market dictates. This is therefore essential before we can put all these factors into place and look at the whole picture: what to produce, how much of it to p...