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Economy and economics
<What is the economy?>
The economy refers to the system and state of production, distribution and consumption of goods and services, and can describe how people, businesses and governments produce, distribute and consume goods using limited resources. The concept of economy includes many aspects of life and business activity, as well as national wealth and growth, unemployment and inflation, and is used, for example, as the Japanese economy, the global economy, the regional economy, etc., and is treated as a generic term for economic activity on an individual, organisational and international scale.
<What is economics?>
Economics is a field of study that seeks to understand and elucidate the workings of the economy, in which economists analyse the mechanisms and trends of economic activity and use theories and models to explain phenomena. Economics is broadly divided into microeconomics (the behaviour of individuals and companies) and macroeconomics (national and global economic flows), with microeconomics dealing with theories about individual markets and consumers, such as supply and demand, price formation and consumer behaviour, and macroeconomics dealing with economic growth, unemployment rates, inflation, fiscal and monetary policy and analysing country-wide economic indicators and phenomena.
Economics is not only the study of theory, but also a means of solving real-world problems, and on the basis of economic theory, policymakers can design better economic policies and seek ways to improve the welfare of society.
‘Economy’ refers to the activity or phenomenon itself, while ‘economics’ can be described as the discipline that studies, understands and tries to improve it.
A history of economics for young readers – Chapter 1: Cool heads and warm hearts
Yale University Press’s A Little History of Economics is an accessible introduction to the history of economics for young readers, explaining in simple language the major ideas and events in economics from ancient times to the present day, and covering economic thinkers such as Adam Smith and Karl Marx and other economic thinkers are also covered. In this article, I would like to start with this book.
Chapter 1, ‘Cool Minds and Warm Hearts’, states that economics is ‘the study of how society uses its resources’. Resources here include useful things such as bread and shoes (defined as ‘goods’ in economics), land and coal, people and machinery.
He cites the situation in Burkina Faso, a poor country in West Africa, where more than half of the youth and two-thirds of the girls cannot read, and instead of learning arithmetic and language, they spend a whole day carrying water to the huts where their families live, and says that economics has made the idea that ‘the people of Burkina Faso are poor because at least some of them are lazy The report states that economics reveals why the people of Burkina Faso are poor because they were born into an economy that is not suited to the production of goods, although they work hard.
Thus, economics is not about tasteless and boring statistics and mathematics, but about solving questions such as ‘How can people survive, stay healthy and get an education?’, ‘How can people get the things they need to lead happy and fulfilling lives?’, ‘Why can’t some people get them? and ‘why some people do not get them’.
It states that the resources that economics is concerned with are ‘finite in number’ and that there is a ‘cost’ to obtaining them. This cost is not just the money spent to obtain the resource, but also the ‘opportunity cost’ of missing out on the limited number of options available. It states that one of the roles of economics is to consider and explain what was the right choice and what should have been done.
There are various approaches to this explanation, including ‘empirical economics’, which tries to find scientific laws, and ‘normative economics’, which describes what is good or bad, and this book describes these approaches in 37 chapters, including historical trends.
Economics in the real world – Market design
Chapter 37, Economics in the real world, discusses market design. Market design is the discipline of designing market structures and rules to achieve efficient and fair transactions, and is based on economic theory, but aims to optimise the matching of supply and demand and the mechanics of transactions in real markets to achieve an efficient allocation of resources.
This would be how to provide a forum for exchange for items that have never been sold before and for which no one knows how much they are worth.
Examples of these include auctions, which are a way of efficiently distributing resources through competitive price formation, such as frequency auctions (the allocation of radio frequencies used by mobile operators) and online advertising bidding systems; ‘resident matching’ in the healthcare sector (doctors and hospitals Matching’ (matching doctors and hospitals) in the medical sector, “School Choice” (matching students and schools) in the education sector, designing platforms for efficient transactions between users and providers in the sharing economy sector (Uber, Airbnb, etc.), online advertising markets and other new markets in the digital age. This was also seen as an important foundation for building
Market design and algorithms
Such market design is integrated with interdisciplinary knowledge such as algorithms, game theory and economics, and is particularly closely related to algorithms. Market design requires the design of efficient and fair markets, in which algorithms are essential to solve complex problems, which in turn rely on computer-based computational processes.
Examples of the relationship between market design and algorithms are discussed below.
1. auctions and bidding algorithms: an important application area of market design is ‘auctions’. Auctions utilise algorithms that optimise bidding strategies and pricing in order to achieve the best results for both sellers and bidders. Algorithms are designed to determine rankings. This uses the search algorithm described in ‘Overview of search algorithms and various algorithms and implementations’ and the algorithm for the multi-armed bandit problem described in ‘Overview of the multi-armed bandit problem, applicable algorithms and implementation examples’.
2. Matching algorithms: Matching algorithms used in market design are methods for efficient matching of demand and supply sides. For example, they are used for matching hospitals with medical students and companies with job applicants, and one well-known algorithm is the Gale-Shapley algorithm for solving the Stable Marriage Problem, which is described in ‘Overview, Applications and Implementations of the Stable Marriage Problem algorithm’. This enables the most satisfactory matching for both parties and maximises the utility of the overall system.
3. price optimisation and dynamic pricing: in the sharing economy and online marketplaces, prices fluctuate dynamically to balance supply and demand. For example, Uber and Airbnb have introduced ‘surge pricing’, described in ‘Machine learning and algorithms used for surge pricing and examples of implementation’, which increases prices at times of high usage or in certain regions. To achieve this, machine learning and optimisation algorithms are used to adjust prices in real time to calculate the right price according to demand.
4. recommendation systems and personalisation: platforms such as Amazon and Netflix play an important role in market design with algorithms that recommend products and services based on users’ preferences and buying habits, as discussed under “recommendation technology”. Recommendation systems utilise collaborative filtering and deep learning algorithms, which make it easier for users to find relevant products and for companies to increase sales.
5. algorithms for optimisation and fairness: optimisation algorithms are also important in market design to ensure that markets function efficiently and fairly. For example, for allocation equity and profit optimisation, the Kelly Criterion and equity-aware optimisation algorithms, which are also described in ‘Overview and examples of implementation and application of Kelly Criterion and equity-aware optimisation algorithms’, may be used. These algorithms ensure that certain groups or regions are not unfairly disadvantaged and are designed to reduce economic inequality.
6. blockchain and decentralised markets: smart contracts have recently been used in market design in decentralised markets built on blockchain technology, as described e.g. in ‘Applications and implementations of directed acyclic graphs and on blockchain technology’. This ensures secure and reliable transactions without third-party intervention and maintains the transparency of transactions. Smart contract algorithms programmematically enforce the terms of the transaction, enabling contracts to be automated and tamper-proof.
The role of algorithms in market design is not only to increase efficiency, but also to structure the market so that participants can trade securely and fairly. The algorithms aim to create an ideal market that reflects the needs and conditions of diverse participants.
reference book
Reference books on algorithms in market design are discussed.
1. “Market Design: A Linear Programming Approach”
3. “Market Design: Theory and Applications”
4. “Algorithms”
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