Principles of Economics II - Unit 5: Strategic Behaviour

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What is game theory?

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Game theory is the study of how people behave in strategic situations.

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Why is game theory useful in economics?

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It is useful for understanding oligopolies and situations with a small number of players interacting.

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This set of flashcards covers the key concepts of game theory as applied to oligopoly from the lecture notes.

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9 Terms

1
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What is game theory?

Game theory is the study of how people behave in strategic situations.

2
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Why is game theory useful in economics?

It is useful for understanding oligopolies and situations with a small number of players interacting.

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What is a key feature of an oligopolistic market?

The tension between cooperation and self-interest among the few sellers.

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What is collusion in the context of oligopolies?

An agreement among firms in a market about quantities to produce or prices to charge.

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What is a cartel?

A group of firms acting in unison.

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What is the 'Prisoners’ Dilemma'?

A game that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.

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What does 'Nash equilibrium' refer to?

A situation where economic actors choose their best strategy given the strategies of others.

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What is a dominant strategy?

A strategy that is best for a player regardless of what the other players choose.

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Why do oligopolists struggle to maintain cooperative outcomes?

Because each firm focuses on maximizing its own profit, creating incentives to cheat.