Summary:
Things to understand and watch videos about:
-adverse selection and moral hazard:
Adverse Selection vs. Moral Hazard
-Game theory:
Game Theory and Oligopoly: Crash Course Economics #26
Game Theory Explained in One Minute
Game Theory 101 (#1): Introduction
→ John Nash:
The Nash Equilibrium (A Beautiful Mind, John Nash): Definition, Explanation & …
Game Theory 101: What Is a Nash Equilibrium? (Stoplight Game)
JOHN NASH GAME THEORY
-Demand and supply:
Supply and Demand: Crash Course Economics #4
Supply and demand in 8 minutes
Demand and Supply Explained- Macro Topic 1.4 (Micro Topic 2.1)
-Neoclassical economics:
What is Neoclassical Economics? | Explained | IB Microeconomics | IB Econo…
Episode 6: Neoclassical Economics | Explained
- adverse selection and moral hazard:
Asymmetric Information, Adverse Selection & Moral Hazard | Economics Expla…
Adverse Selection vs. Moral Hazard
-Asset specificity:
Asset specificity
Assets and Liabilities Defined, Explained and Compared in One Minute
- quasi rents:
Quasi Rent
-Agency theory:
Agency Theory (With Real World Examples) | From A Business Professor
-Agency costs:
What is Agency Cost | What is Agency Problem | Principal Agent Conflict
-Behavioural theory of the firm:
Behavioral theory | Behavior | MCAT | Khan Academy
-risk aversion and loss aversion
Loss Aversion vs Risk Aversion
-SCP-Paradigm
Deep Dive into Structure-Conduct-Performance (S-C-P) | Prof. Dr. Kai Reinhardt
,Week 1:
Lectures:
1st lecture:
-Economics is about (economic) interaction and the creation of value
-when the value increases → economic growth
Economic growth:
-economic growth is caused by productivity growth (to increase reallocation of
activities)
-Why does productivity growth?
→ Private property rights (the better protected = better rewarded → harder working)
→ prices ( Why/What/How/How much/Who?)
→ companies ( through investments, technology etc.)
-System gives incentives to behave efficient and effective
Economics and choices:
The economy is the sum of all individual choices of people and organizations
• People make a tradeoff between their individual costs and benefits (think they
are better off after their choices than before/without)
How do we make these choices?
• In traditional economics “rational” and “maximizing/optimizing” behavior is assumed
• Nowadays lot of attention for “bounded rationality” and “cognitive biases”
• Governments use rules, regulations and incentives to influence these choices
Economic Problem - The economic problem is the fundamental challenge facing all
societies, which is how to satisfy unlimited wants and needs with limited resources
(Scarcity occurs when society cannot fulfill all its wants because resources are
limited)
What has to be produced?
How should this be produced?
Who will receive the produced goods and services?
• In a market economy: prices
• Producing value is based on “resources” - can be used in different ways and for
different purposes
• This makes every choice a trade-off
Economics: what is the most effective and efficient way to use available resources to
achieve a goal (create value)?
→ economists try to understand the processes behind the creation of value
Choices
We make (unconscious) choices all day long
,• With these, we look at the revenues and costs of those choices (“there is no such
thing as a free lunch!”)
Opportunity costs: The (missed) “net value” of your second choice (decision I didn’t
take; cost of what im missing out)
• influence behavior and choices
Fe Cost of studying? Cost of working? Cost of certain government policy? Cost of
firm’s strategy?
→ With opportunity costs we see which choice we should make between two
alternatives
The “true” costs of any choice are the alternative that you sacrifice (relative prices?)
• Value of that choice (utility/well being/profit) - willingness to pay
• Explicit costs of that choice: What does it cost?
• Implicit costs of that choice (=opportunity costs): What do I give up?
Economic costs = Explicit + Implicit costs
Right/optimal choice:
• Choice which has higher ‘value’ than ‘economic costs’
Economic rents: value - economic costs
- measure of your overall gain when you choose the best option rather than the
next best one
Sunk costs
- costs that cannot be (fully) recovered
• Sunk costs fallacy → (wrongly) taking sunk costs into account in decision making
• Sunk costs affect our emotions, we experience them as losses
Rule of thumb:
If costs cannot be reversed, you should not include them in your current
considerations (girl maths)
• If costs can be (partially) reversed, you should include the costs that can be
reversed as explicit costs in your current considerations
Marginal analysis
Another choice we have to make is: How much of something should we produce,
buy or spend our time on?
• “Rational” and “optimizing” behavior
Which choice (what quantity) yields the highest outcome?
, • In other words: What is the most efficient choice? Which quantity yields the highest
profit, happiness, utility?
→ if overdoing benefits might decrease (eg coffee)
Marginal benefits
• What is the return/benefit of one extra unit? (Extra hour studying, extra pair of
shoes)
Marginal costs
What are the costs of one extra unit?
This is not always constant (usually not)!
• Diminishing/increasing marginal costs/benefits
Opportunity costs should be taken into account
Most efficient point:
• Marginal benefits = marginal costs
• Or point closest to the where MB>MC
Prices
Back to the economic problem
• What (and how much) should be produced?
• How should this be produced?
• Who will receive the produced goods & services?
→ Capitalism Market economy
• The economic problem is ‘solved’ using markets and prices.
• Society determines through demand what is produced and how this is produced
- Prices are determined by individual decisions of people and organizations
Incentives government → prices
Incentives (and unintended consequences) - Incentive effects triggered by economic
policy (mostly tax) to increased economic willingness to perform
Governments use set of instruments to influence choices
Things to understand and watch videos about:
-adverse selection and moral hazard:
Adverse Selection vs. Moral Hazard
-Game theory:
Game Theory and Oligopoly: Crash Course Economics #26
Game Theory Explained in One Minute
Game Theory 101 (#1): Introduction
→ John Nash:
The Nash Equilibrium (A Beautiful Mind, John Nash): Definition, Explanation & …
Game Theory 101: What Is a Nash Equilibrium? (Stoplight Game)
JOHN NASH GAME THEORY
-Demand and supply:
Supply and Demand: Crash Course Economics #4
Supply and demand in 8 minutes
Demand and Supply Explained- Macro Topic 1.4 (Micro Topic 2.1)
-Neoclassical economics:
What is Neoclassical Economics? | Explained | IB Microeconomics | IB Econo…
Episode 6: Neoclassical Economics | Explained
- adverse selection and moral hazard:
Asymmetric Information, Adverse Selection & Moral Hazard | Economics Expla…
Adverse Selection vs. Moral Hazard
-Asset specificity:
Asset specificity
Assets and Liabilities Defined, Explained and Compared in One Minute
- quasi rents:
Quasi Rent
-Agency theory:
Agency Theory (With Real World Examples) | From A Business Professor
-Agency costs:
What is Agency Cost | What is Agency Problem | Principal Agent Conflict
-Behavioural theory of the firm:
Behavioral theory | Behavior | MCAT | Khan Academy
-risk aversion and loss aversion
Loss Aversion vs Risk Aversion
-SCP-Paradigm
Deep Dive into Structure-Conduct-Performance (S-C-P) | Prof. Dr. Kai Reinhardt
,Week 1:
Lectures:
1st lecture:
-Economics is about (economic) interaction and the creation of value
-when the value increases → economic growth
Economic growth:
-economic growth is caused by productivity growth (to increase reallocation of
activities)
-Why does productivity growth?
→ Private property rights (the better protected = better rewarded → harder working)
→ prices ( Why/What/How/How much/Who?)
→ companies ( through investments, technology etc.)
-System gives incentives to behave efficient and effective
Economics and choices:
The economy is the sum of all individual choices of people and organizations
• People make a tradeoff between their individual costs and benefits (think they
are better off after their choices than before/without)
How do we make these choices?
• In traditional economics “rational” and “maximizing/optimizing” behavior is assumed
• Nowadays lot of attention for “bounded rationality” and “cognitive biases”
• Governments use rules, regulations and incentives to influence these choices
Economic Problem - The economic problem is the fundamental challenge facing all
societies, which is how to satisfy unlimited wants and needs with limited resources
(Scarcity occurs when society cannot fulfill all its wants because resources are
limited)
What has to be produced?
How should this be produced?
Who will receive the produced goods and services?
• In a market economy: prices
• Producing value is based on “resources” - can be used in different ways and for
different purposes
• This makes every choice a trade-off
Economics: what is the most effective and efficient way to use available resources to
achieve a goal (create value)?
→ economists try to understand the processes behind the creation of value
Choices
We make (unconscious) choices all day long
,• With these, we look at the revenues and costs of those choices (“there is no such
thing as a free lunch!”)
Opportunity costs: The (missed) “net value” of your second choice (decision I didn’t
take; cost of what im missing out)
• influence behavior and choices
Fe Cost of studying? Cost of working? Cost of certain government policy? Cost of
firm’s strategy?
→ With opportunity costs we see which choice we should make between two
alternatives
The “true” costs of any choice are the alternative that you sacrifice (relative prices?)
• Value of that choice (utility/well being/profit) - willingness to pay
• Explicit costs of that choice: What does it cost?
• Implicit costs of that choice (=opportunity costs): What do I give up?
Economic costs = Explicit + Implicit costs
Right/optimal choice:
• Choice which has higher ‘value’ than ‘economic costs’
Economic rents: value - economic costs
- measure of your overall gain when you choose the best option rather than the
next best one
Sunk costs
- costs that cannot be (fully) recovered
• Sunk costs fallacy → (wrongly) taking sunk costs into account in decision making
• Sunk costs affect our emotions, we experience them as losses
Rule of thumb:
If costs cannot be reversed, you should not include them in your current
considerations (girl maths)
• If costs can be (partially) reversed, you should include the costs that can be
reversed as explicit costs in your current considerations
Marginal analysis
Another choice we have to make is: How much of something should we produce,
buy or spend our time on?
• “Rational” and “optimizing” behavior
Which choice (what quantity) yields the highest outcome?
, • In other words: What is the most efficient choice? Which quantity yields the highest
profit, happiness, utility?
→ if overdoing benefits might decrease (eg coffee)
Marginal benefits
• What is the return/benefit of one extra unit? (Extra hour studying, extra pair of
shoes)
Marginal costs
What are the costs of one extra unit?
This is not always constant (usually not)!
• Diminishing/increasing marginal costs/benefits
Opportunity costs should be taken into account
Most efficient point:
• Marginal benefits = marginal costs
• Or point closest to the where MB>MC
Prices
Back to the economic problem
• What (and how much) should be produced?
• How should this be produced?
• Who will receive the produced goods & services?
→ Capitalism Market economy
• The economic problem is ‘solved’ using markets and prices.
• Society determines through demand what is produced and how this is produced
- Prices are determined by individual decisions of people and organizations
Incentives government → prices
Incentives (and unintended consequences) - Incentive effects triggered by economic
policy (mostly tax) to increased economic willingness to perform
Governments use set of instruments to influence choices
