1.0 Introduction

Microeconomics is a social science that studies how individuals and firms “make themselves as well off as possible in a world of scarcity” (Perloff 2010, p. 25). As one of the main objectives of contemporary microeconomics is to explain real-life issues, contemporary microeconomic theories are often used by individuals, governments and firms to assist with important decisions. Consumers use microeconomics to help them make spending decisions which maximise their utility. Firms use microeconomics to make informative decisions with regards to consumer behaviours, productivity, supply and demand and costs and revenue. Microeconomics is also important for governments, who use microeconomic policies to improve the microeconomics of markets by determining taxes and wage levels. This essay is going to illustrate how contemporary microeconomics can be applied when addressing real-life practical issues, focusing on the content covered in previous lectures.

2.1 Prisoner’s Dilemma and Nash Equilibrium

Game theory is the study of “conflict and cooperation” (Turocy et al 2001) and involves studying how the decisions of players in a certain situation affect the decisions of the other players. The Prisoner’s dilemma is a situation in game theory that illustrates why two individuals may choose to act in their self-interest and not cooperate, even if it appears that it is in their best interests to cooperate. Nash equilibrium is a “stable state in which no player can gain advantage through a unilateral change of strategy” (Chang 2015). Prisoner’s dilemma and Nash equilibrium are concepts studied within game theory that, when applied to real-life issues, the applications are endless.

A topical example of the prisoner’s dilemma is Brexit – the two “prisoners” in this case being the UK and the EU. The UK’s decision to defect and leave the EU in an attempt to exploit its own self-interest and reap the advantages of the EU’s single market without the costs, leads to the EU also “defecting”. This could result in detrimental impacts for not only the EU but also the rest of the world, for example, it could instigate possible trade wars. Both “prisoners” act in their self-interests, disregarding the risk of impacting a much larger community. Murray (2016) suggests that both sides should remember the prisoner’s dilemma and the negative impacts that could be brought about, and therefore should “go for the optimal resolution by cooperating”. Murray (2016) states that to cooperate, the UK and the EU should be willing to negotiate a free trade deal. Another real-life application of the prisoner’s dilemma is the problem of greenhouse gas emissions and climate change. The best individual outcome for a country would be to defect (continue to pollute), while other countries cooperate and stop polluting. To break the prisoner’s dilemma, it is often necessary for authoritative bodies to step in, for example, in 2008 the UK government implemented the world’s first legally binding target – the 2008 Climate Change Act. The aim of this act is to reduce the UK’s CO2 emissions by 80% by the year 2050 (Gov.uk 2015).

In 2008, Satoshi Nakamoto invented blockchain to act as the transaction ledger of bitcoin. (Antonopoulos 2017) states that “bitcoin is a collection of concepts and technologies that form the basis of a digital money ecosystem”. Bitcoin blockchain was designed so that it is continuously in a state of self-reinforcing Nash equilibrium (Curran 2018). The concept of Nash equilibrium is crucial in Bitcoin, because it is important that the entire protocol is in a continued state of Nash equilibrium, so it discourages bitcoin miners from attempting to cheat the system, and in fact, is why blockchain is “cheat-free” (Blockgeeks 2017).

2.2 Blockchain

Blockchain is “an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value” (Tapscott 2016). In addition to being the technology behind the cryptocurrency Bitcoin, there are countless real-li