This is a zoom-in, zoom-out, connect-the-dots tour of Game Theory, Competition and the Elasticity of Demand andSupply.
Let's parse that
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The Law of Demand seems simple enough - why do so many folks lose sight of it? Oh, and they usually live to regret it.
Sometimes, the demand for luxury goods is self-perpetuating
Inferior goods and luxury goods share one dark similarity
Shifts in the demand curve are different from movements along the demand curve
Tea and coffee are substitutes; fish and chips are complements
Higher prices attract more producers
The Law of Supply seems very intuitive, but it is ignored by many - at their own peril! Let's look at home prices, oil prices, and interest rates as examples of the law of supply.
Input prices, technological change and government interventions can shift the supply curve quite drastically
Markets 'clear', i.e. demand and supply curves combine magically, based on the interplay of consumers and producers
Elasticity measures how sensitive to price the demand for something is
Perfect competition and predatory producers - let's talk about them both
Young fast-growing firms would do well to remember this: revenue is maximised when elasticity is one.
Elasticities for upward-sloping demand curves carry a different sign than usual elasticities.
The concept of elasticity is easily and widely generalizable.
Linear demand curves are worth discussing in detail for a couple of reasons.
When the government imposes a tax, who pays - producers or consumers? Elasticity helps answer that question.
The economics of agriculture are terrible - understand why.
Minimum wages usually 'work', i.e. they serve their intended purpose. Elasticity explains why.
Unlike minimum wages, price controls usually don't work, i.e. they do NOT serve their intended purpose. Once again, elasticity explains why
There is no such thing as a free lunch - and too much of a good thing is no good. Economics explains
Water or diamonds? That depends whom you ask.
What should we spend our money on? Indifference curves hold a clue
Demand curves and income effects can both be modeled using indifference curves.
Consumers usually have a pretty sweet deal.
Nothing comes from nothing. Land, labor and capital go into making anything worth buying.
Bottle-necks in production have an underlying explanation in economics
What should a firm spend its money on?
Is big beautiful? The answer is - it depends on the returns to scale.
Business models are driven by cost structures. Understand where these come from.
The intersection of the average and marginal cost curves is the minimum average cost that a firm can operate at.
Horizontal, vertical, backward-bending - let's talk about them all.
In the long run - we are all dead.
Perfect competition can be brutal. Understand the take-it-or-leave-it dynamics of such business
The optimal strategy for a firm in a perfectly competitive environment is to tweak its cost structure until P = MC
The prize of perfect competition is to end it and move to monopoly. Not so fast, though - the government has other ideas.
A Nokia phone is a phone. An Apple iPhone maybe THE phone.
The duopoly game has an important lesson - the more loyal your customers are, the less you need to discount. Game Theory shows how.
In the absence of customer loyalty, price becomes the weapon of choice - and leads to a destructive equilibrium.
Even enemies should talk, and trust - even if just a little bit. That's rational for both.
Game Theory addresses the thorny issue of the commercialisation of sport
Loonycorn is us, Janani Ravi and Vitthal Srinivasan. Between us, we have studied at Stanford, been admitted to IIM Ahmedabad and have spent years working in tech, in the Bay Area, New York, Singapore and Bangalore.
Janani: 7 years at Google (New York, Singapore); Studied at Stanford; also worked at Flipkart and Microsoft
Vitthal: Also Google (Singapore) and studied at Stanford; Flipkart, Credit Suisse and INSEAD too
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