Introduction Economics 302 - Microeconomic Theory II: Strategic Behavior Shih En Lu

Economics 302 - Microeconomic Theory II: Strategic Behavior
Shih En Lu
Simon Fraser University
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Welcome to ECON 302!
Instructor: Shih En Lu
Next hour:
Overview of the course material
Functioning of the course
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When Markets Work Well
In ECON 201, you focused on markets where:
there are many buyers and many sellers;
everyone knows all the relevant information (e.g. characteristics of the
good); and
transactions do not directly impact third parties.
As a result:
market participants take prices as given, and buy [sell] as long as their
valuation of the good is higher [lower] than the price;
these valuations accurately re‡ect the buyers’bene…t and the sellers’
cost; and
these bene…ts and costs correspond to the bene…ts and costs for the
overall economy.
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What Can Go Wrong? (I)
Some markets fail to have many sellers.
In this case, sellers realize that selling more leads to a lower price.
So while selling an extra unit at P dollars still brings in P from the
sale, it also costs the …rm through a lower price on all the units that
would have been sold anyway. Marginal revenue is less than the
The seller will therefore produce a quantity where its marginal cost
is below the price =) ine¢ ciency!
Similar problem arises when there are few buyers.
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What Can Go Wrong? (II)
Sometimes, information about a good can be incomplete. This is
especially problematic when one side of the market knows less than
the other.
An insurance company doesn’t know exactly how risky its customers
are. So it can have a hardtime gauging the cost of the service it
Insured customers are tempted to act less carefully, and one cannot
fully monitor their behaviour.
These problems can preclude the e¢ cient outcome, and could even
make the market unravel completely.
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What Can Go Wrong? (III)
Finally, some transactions impact third parties.
Much of this course deals with these market failures:
Market power: monopoly, oligopoly
Asymmetric Information: hidden action (moral hazard), hidden
characteristic (adverse selection)
Externalities and public goods (brie‡y)
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Where Game Theory Comes In
Under perfect competition, as long as you know the price, you can
maximize utility/pro…t without worrying about other market
When there are two or more …rms with market power, each …rm must
anticipate other …rms’behaviour, which a¤ects the price.
When there is hidden information, the uninformed party must take
into account how the informed party will react to its decisions.
How do we analyze these complex situations?
Game theory: a toolbox for studying "strategic" behaviour.
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This Course
My o¢ ce is WMC 4661.
TA and our OHs: see syllabus.
Come and see us during o¢ ce hours, or by appointment - don’t be
shy, but be well prepared.
Don’t come outside of o¢ ce hours unless you have an appointment.
Textbooks: none required. See syllabus for recommendations.
Slides will be posted before lecture. They are not su¢ cient on their
own as notes: you should complete them with your own notes during
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9 problem sets. Discuss problems with each other - most of you will
learn a lot from each other - but write your own solutions.
Due at the beginning of lecture on dates indicated on the syllabus
Can erase up to 25% of the marks you lose on exams - see course
document for details
Only graded for completeness - so don’t copy from others or last
semester’s solutions
Each problem set is worth 5 points, and you only need 39 points for
the maximum grade bene…t.
You will not be allowed to make up or receive an adjustment for the
…rst problem set missed for a valid reason, since you can still get 39
points from the other 8.
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A quiz (28 points), a midterm (72 points) and a …nal (125 points)
Slightly shorter - so hopefully more manageable - than past years
You must see me at least 7 days before the quiz/midterm for an
exemption (except for medical emergencies).
If you miss the quiz/midterm for a medical reason, you must present
(email is …ne) an SFU Certi…cate of Illness within 10 days of the
test. You must see the doctor on or before the day of the test.
Email me this week if you will miss the …nal for religious reasons.
Otherwise, only medical emergencies are acceptable.
See the document posted online for detailed rules.
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What You’re Getting Yourself Into
In high school, the teacher did problems in class. Then you repeated
the same problems (with di¤erent numbers) on the homework. And
then, you repeated the same problems again on the exam.
This is an upper division university course, where you’re
expected to think on your own.
The lectures will teach the theory. Time permitting, we will go over
basic examples.
You will need to …gure out how to solve the problem set
questions, some of which are complicated.
Part of the exams will test whether you can apply course concepts to
problems that you haven’t encountered before.
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What You’re Getting Yourself Into (II)
If you expect to be spoon-fed problem-solving methods and get by
using rote learning and "plug ’n chug," you will be frustrated and
If you are ready to think deeply about the material and …gure out
di¤erent ways to apply it, you will …nd this course rewarding, learn a
lot and maybe even have fun along the way.
I’ve posted some tips online from me and from former students. Go
read them if you’re worried.
This course is not taught at a graduate level, where one spends lots
of time proving things mathematically. However, this course should
provide good preparation for graduate coursework.
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What You’re Getting Yourself Into (III)
I’m very blunt. If you’re wrong, I’ll say it directly. If you don’t know
something basic that was repeatedly emphasized in class, I’ll tell you
that’s not OK. Remember that I’m just being direct, and I’m not
judging you as a person.
I cold call, especially when there are no volunteers to answer a
question. This is not to put people on the spot, but rather to
get an idea of what people are struggling with. I don’t typically
remember who I call upon, so don’t take it personally if I use your
answer to illustrate common mistakes that people make.
Ultimately, I want all of you to succeed (but I will not arti…cially
make that happen by lowering standards). If I get frustrated, it’s
usually not at you, but simply at the results.
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My Expectations
Don’t try to leave class before time unless I’m done.
Never fall behind. You should understand everything in a week’s
lecture slides before the following week’s lectures.
On average, each problem set should take you around 4-7 hours. This
is entirely reasonable for a 4-credit course with no papers and no
required readings. However, some of you will need more time (and
others less).
Everybody should aim to get full marks on problem sets.
Learn the de…nitions. Because most exam questions are di¤erent
from problem set questions, you will have trouble understanding them
if you do not bother learning what the words mean.
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There is no set pass mark due to variation in exam di¢ culty across
semesters. There is no …xed grading scale.
There is no set grade distribution due to variation in student quality
across semesters. There is no …xed curve.
In semesters where multiple sections of ECON 302 have similar
student quality (as judged by their CGPA distribution), the instructors
use similar grade distributions.
Read the syllabus and course policies carefully and never ask for
an exception: the answer is NO. Asking for an exception (for
example, "Can you shift some weight from this exam to that exam?")
will simply get you -1 on your …nal grade.
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Why Hard Exams Are Good For You
They reward understanding rather than learning by heart. If you
just learn the material by heart, you’d forget it a week after the …nal,
and this whole course would be a huge waste of your time.
Suppose you have a bad day on the midterm. If the …nal is easy, you
can’t catch up! So hard exams make the course more forgiving.
You’re sure that you won’t be "curved down": much better to get
45% and realize that’s a C than to get 60% and realize that’s a D!
So don’t be demoralized by low numerical scores: if you can get
over the "sticker shock", they’re actually good for you!
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Why This Course Is Very Quantitative
(Much of) microeconomic theory =
express common sense hypotheses as precise mathematical
assumptions, and then
use math again to derive results from the assumptions and make sense
of the world.
Math helps identify hidden/implicit assumptions that might not
always hold, and helps avoid con‡ating related but di¤erent concepts.
We will use things you should have learned in ECON 103, ECON 201,
MATH 157 and BUEC 232.
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