Archive for category: ECON 130

In the first six weeks we described models of individual and firm choice, and given many individuals and many firms we were able to describe a competitive market.

In doing so we found that the outcomes in a competitive market allowed gains from trade – buyers who valued the products more than the sellers were trading with each other. But there were issues:

• It assumed there were lots of potential sellers of a homogenous product whose choices have no influence on the choice of other sellers.
• It assumed there were no systematic biases in consumer choices and ignored agency problems in production.
• It took for granted full, or at least symmetric, information about the product and the market.
• It didn’t incorporate the way the choice to produce or consume could impact upon a third party (externalities).
• It assumed that the institutional structure ensured the product was excludable.

These assumptions do hold in some circumstances – and even when they don’t there could be a good reason we start with it (eg assuming a systematic bias without evidence is just assuming people are stupid – which isn’t a good starting point for trying to objectively understand their choices).

But we would like to think about other types of market structures we observe.

Since then we have built some more tools to think about choice – comparative advantage, finance, game theory, and emergent macro-phenomenon.

Armed with these tools we can return to our original market model and ask “what happens when there is only one firm – with the same motives and desires as the many firms before”. This is the case of monopoly.

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One week, two big topics! Today we’re discussing Game Theory.

This topic is awesome, and really wish we could give it more space – in future economics you will.

So what are we thinking about here.

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This weeks discussion is something a bit different. For the first six weeks we were building up models of producer and consumer choice, and finished with our market model of “perfect competition”. Given this we were able to discuss gains from trade where all producers were the same – but consumers were a bit different.

What we have done this week is actually quite similar – we have asked about gains from trade when the production possibilities were actually a bit different. Given that we have noted that, with different productive opportunities specialisation can generate gains from trade!

The example we use for this is international trade – and that is what we have done in the lectures here and here.

As a practice exercise, can you describe the current shock associated with COVID in terms of a Production Possibility Frontier diagram based on the Australia and NZ trade example in lectures. Graphically what does the shock look like? Could the shock increase New Zealand’s comparative advantage in making Wool? What does this mean?

I’ll put up an answer to this after you test on Monday – as this content is not in this test.