STRATEGIC INTERACTIONS & SOCIAL DILEMMAS
Full Exam Explanation Notes
1. Introduction — What This Unit Is About
Earlier in economics, you studied individual decision-making.
Example:
A farmer decides how much maize to plant based on price and cost alone.
In many real-world situations, however, your decision depends on what other people do.
Examples:
• Farmers deciding whether to irrigate
• Countries deciding whether to reduce pollution
• Companies deciding what price to charge
• Students deciding whether to study if others cheat
These situations are called social interactions.
Strategic Interaction (Very Important Definition)
A strategic interaction is a situation where:
• your best decision depends on what others choose
• their best decision depends on what you choose
This interdependence is the foundation of game theory.
Why Strategic Interaction Matters (Big Exam Concept)
Strategic interaction helps explain many important social problems:
• Climate change
• Overfishing
• Overgrazing
• Corruption
• Free-riding in group work
These situations often lead to the famous problem called:
The Tragedy of the Commons
The tragedy of the commons occurs when:
Individuals acting in self-interest overuse a shared resource, causing the resource to be destroyed.
Example:
A shared pasture is available to many farmers.
Each farmer adds more cows to increase personal profit.
Result:
Too many cows → grass disappears → everyone becomes worse off.
, 2. Game Theory
Game theory is the mathematical framework used to analyse strategic interactions.
It studies how rational individuals make decisions when outcomes depend on others’ actions.
What Is a Game?
A game is a simplified model used to describe a strategic interaction.
A game has five key components.
1. Players
Players are the decision-makers in the game.
Example:
Two farmers.
2. Strategies
Strategies are the actions available to each player.
Example:
• Grow rice
• Grow cassava
Each player must choose one strategy.
3. Order of Play
The order in which players make decisions.
Two possibilities:
Simultaneous game
Players choose at the same time without knowing the other’s decision.
Sequential game
One player decides first and the other observes this before deciding.
4. Information
Information refers to what players know when making decisions.
Example question:
Do you know what the other farmer has chosen?
Information can be:
• perfect information
• incomplete information
5. Payoffs
Payoffs represent the outcome each player receives.
Payoffs may represent:
• money
• profit
• happiness
• utility
Players aim to maximize their payoff.
Full Exam Explanation Notes
1. Introduction — What This Unit Is About
Earlier in economics, you studied individual decision-making.
Example:
A farmer decides how much maize to plant based on price and cost alone.
In many real-world situations, however, your decision depends on what other people do.
Examples:
• Farmers deciding whether to irrigate
• Countries deciding whether to reduce pollution
• Companies deciding what price to charge
• Students deciding whether to study if others cheat
These situations are called social interactions.
Strategic Interaction (Very Important Definition)
A strategic interaction is a situation where:
• your best decision depends on what others choose
• their best decision depends on what you choose
This interdependence is the foundation of game theory.
Why Strategic Interaction Matters (Big Exam Concept)
Strategic interaction helps explain many important social problems:
• Climate change
• Overfishing
• Overgrazing
• Corruption
• Free-riding in group work
These situations often lead to the famous problem called:
The Tragedy of the Commons
The tragedy of the commons occurs when:
Individuals acting in self-interest overuse a shared resource, causing the resource to be destroyed.
Example:
A shared pasture is available to many farmers.
Each farmer adds more cows to increase personal profit.
Result:
Too many cows → grass disappears → everyone becomes worse off.
, 2. Game Theory
Game theory is the mathematical framework used to analyse strategic interactions.
It studies how rational individuals make decisions when outcomes depend on others’ actions.
What Is a Game?
A game is a simplified model used to describe a strategic interaction.
A game has five key components.
1. Players
Players are the decision-makers in the game.
Example:
Two farmers.
2. Strategies
Strategies are the actions available to each player.
Example:
• Grow rice
• Grow cassava
Each player must choose one strategy.
3. Order of Play
The order in which players make decisions.
Two possibilities:
Simultaneous game
Players choose at the same time without knowing the other’s decision.
Sequential game
One player decides first and the other observes this before deciding.
4. Information
Information refers to what players know when making decisions.
Example question:
Do you know what the other farmer has chosen?
Information can be:
• perfect information
• incomplete information
5. Payoffs
Payoffs represent the outcome each player receives.
Payoffs may represent:
• money
• profit
• happiness
• utility
Players aim to maximize their payoff.
