Introduction to Economics

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These online resources will introduce you to some perhaps familiar (if you study Economics at school) and then unfamiliar concepts in microeconomic theory. The aim of these resources is to provide summaries of the topics covered, with links provided for further reading if you’re interested. The level is pitched between that of an A-Level course and the first-year undergraduate course at Cambridge. Hopefully, the challenge provided will be as stimulating as learning new information from these resources.

The topics covered are income and substitution effects, and Nash equilibria. These are both fundamental to two large strands of microeconomics. Income and substitution effects are the two responses of demand to a price change and so key components to consumer choice theory. These help us understand not only price changes on goods, e.g. in a supermarket, but also how interest rate changes affect saving and borrowing behaviour, and how workers respond to wage rises in terms of their labour supply (not covered here). Nash equilibrium is the key concept in game theory. Game theory is the study of interdependent decision making: how people make decisions when their decisions affect other people’s decisions. As you would expect from the breadth of the definition of interdependent decision making, game theory has many applications, ranging from auctions in Economics to evolution in Biology.

By the end of the resources you should understand:
• what is meant by income and substitution effects
• what Giffen goods are and the conditions required for their existence
• how changes in interest rates give rise to income and substitution effects for savers
• what a Nash equilibrium is and how to find Nash equilibria in simple two player games
• what is meant by Cournot and Bertrand competition, how to find the Nash equilibrium in these models and why these two different types of competition yield different equilibria.

Exercises and solutions are also provided. You should attempt the exercises before looking at the solutions. Exercises are much more interesting and rewarding when you don’t already know the answer!

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