Tuesday, April 26, 2016

Game Theory Part 1

My favorite subject to teach in all of economics is game theory. I teach it about the same in both AP and regular economics. Most introductory microeconomics courses are focused on market structures. Students mostly take notes on three of four market structures, but for oligopoly, students get a two-day lesson. This all starts with them reading the first chapter of Charles Wheelan's Naked Economics. In it, he writes about why there are so few airline providers... HINT - It has to do with limited gate space. Here is a summary of the chapters in the book. I also have the students read this article, from the New York Times, that gives different reasons. This is also a great tie in with price floors, if you have already done supply and demand.

I then play a quick game in which I bring in a $20 bill and I put them in a game. I tell them I would like to give the $20 to the person who thinks they deserve it the most. The problem is scarcity, as I only have one $20 bill. Since there is scarcity, I also can give points back on a quiz, normally 5 points. They must get out a small piece of paper and put their name on it. Their options are as follows: 1. If they think they deserve the $20 most, they put a #2 on the paper. If they want the points, they put a 0 on the paper. If only one person puts a 2 on the paper, that person must come up and get the $20 in front of everyone. If more than one person puts a 2 down their paper, no one gets anything, because I cannot give out both the points and I cannot split the $20. If everyone puts down the 0, then everyone gets the 5 points. In years of doing this, I have only given the money up once and the points up none of the time; therefore, most of the time, all classes get nothing.

I then show the clip from, "A Beautiful Mind" in which the real John Nash, comes up with the idea of game theory.

Next time I will go through the other games/videos I do with the students to illustrate this concept.

If you're new to economics, or you need a refresher on market structures, here it is. Crash Course Game Theory. 

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