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You are here: Home > Educators > Economics > Macroeconomic Controversies > Game Theory - Lesson Plan |
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Game TheoryThis latest resource for students of economics in the 16-19 age group looks at game theory. Game theory is not new - the first steps in the field were taken back in the 1920s - but over the years, Game Theory has become an increasingly important part of research and thinking in the subject. Interestingly, despite its importance in economic theory, there is only one awarding body in the UK that makes reference to game theory in its current specifications - AQA. Despite this, there is no reason why students at this level should not be aware of the basics of game theory and to incorporate an understanding of game theory into responses in examinations. What is Game Theory?Game theory is essentially a theory of decision making. Economics is about the tension that exists between scarce resources and unlimited wants and needs. As a result, we all have to make decisions. In making a decision, there is going to be some form of benefit and an associated cost - the opportunity cost. Underpinning all of economics, therefore, is the process of exchange - two or more individuals or organisation/institutions etc. bargaining for exchange for some mutual benefit. However, in the process of this exchange there are different levels of benefit and cost. The product of economic activity, of which exchange is the basis, has to be divided amongst the various groups involved. It has been said that there are three fundamental questions relating to economic activity:
We can look at economic activity in terms of a cake - the cake is the output of the economy but who gets what proportion is dependent on a variety of different things. Game theorists have applied their minds to understanding how human interaction will affect how the cake is divided up. 
If economic activity results in output - who gets what is produced? Some individuals, regions or countries always seem to get a bigger slice of the cake than others! Can game theory help us to understand why? Copyright: Simeon Eichmann, from stock.xchng. The Origins of Game TheoryThe initial foray into seeing such interaction as a game of strategy was taken up by John Van Neumann and Oskar Morgenstern in the late 1920s. In 1944, they published ' The Theory of Games and Economic Behaviour'. In their own words, they were attempting to look at the debate on exchange from a different perspective - that of a game of strategy. Following publication of this work, a number of academics, including mathematicians, took up the idea and as a result, game theory has become an accepted part of the theory of economics. Its relevance to economics is extensive. It is relevant to the study of, amongst other things:
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