Real people do not always behave like perfectly rational calculators. Behavioural economics studies how they actually decide.
🪞 Biases and heuristics
Traditional economics assumes rational agents. Behavioural economics (Kahneman, Tversky, Thaler) shows systematic departures. Loss aversion: losses hurt about twice as much as equal gains please. Anchoring: first numbers influence later judgements. Present bias: we overvalue immediate rewards. Framing: the same choice phrased differently changes decisions. Herding and overconfidence contribute to bubbles. Bounded rationality: our attention and information are limited.
loss aversion: losing $100 feels about as bad as gaining $200 feels good
anchoring: “was $100, now $60” seems like a bargain even if the item is worth $50
🖼️ See it
Behavioural economics adds psychology to the model, explaining why people save too little or follow the crowd.
🧭 Nudges and policy
A nudge steers choices without banning options by changing the choice architecture. Default effects are powerful: automatic enrolment in pension schemes raised participation from about 50% to over 90% in several countries. Other nudges: reminders, social norms (“most neighbours pay on time”) and simplification. Critics raise autonomy concerns and ask who decides what is best.
opt-in pension: ~50% join
opt-out pension: ~90% stay
increase = 40 percentage points
small nudge, large effect, low cost
Defaults are never neutral. Someone has to choose the default, so it is a design decision.
✏️ Quick check · 1 of 7
Loss aversion
Loss aversion means people:
Losses hurt.
✏️ Quick check · 2 of 7
Anchoring
Anchoring is when:
First number sticks.
✏️ Quick check · 3 of 7
Nudge
A nudge is:
Gentle push.
✏️ Quick check · 4 of 7
Default
Automatic pension enrolment (opt-out) works because of:
Inertia.
✍️ Type your answer · 5 of 7
An opt-in scheme gets 50% to join; opt-out gets 90%.
By how many percentage points does participation rise?
Enter an exact answer, without rounding.
points
Subtract.
✍️ Type your answer · 6 of 7
A person values a $100 gain as 1 and a $100 loss as −2 (loss aversion).
How much is the loss weighted compared with the gain? Give the ratio.
Enter an exact answer, without rounding.
Compare the two.
✍️ Type your answer · 7 of 7
Of 200 workers offered a plan with a default, 180 stay in.
What percentage stay in?
Enter an exact answer, without rounding.
%
Divide, ×100.
📝 Lesson quiz · 5 questions
0 / 5
Re-read the lesson, then give it another go.
Question 1 of 5
Present bias leads people to:
Question 2 of 5
Herding behaviour can contribute to:
Question 3 of 5
Framing effects show that:
Question 4 of 5
Bounded rationality means:
Question 5 of 5
A criticism of nudges is:
Lesson 2 · Modern economics
♟️ Game Theory & Strategy
When one firm’s best choice depends on another’s, we need game theory.
🧊 The prisoner’s dilemma
In a game each player’s payoff depends on others’ choices. A dominant strategy is best whatever the other does. A Nash equilibrium is where no player can improve by changing alone. In the prisoner’s dilemma both do worse by defecting, yet defecting is dominant. Two firms that could collude at high prices each gain by cheating, so cartels are unstable. Repeated games and credible punishments make cooperation possible.
payoffs (A, B):
both cooperate: (3, 3)
A defects, B cooperates: (5, 0)
A cooperates, B defects: (0, 5)
both defect: (1, 1)
defect is dominant; Nash equilibrium (1, 1)
🖼️ See it
Confessing is each player’s best reply whatever the other does, yet both end up worse off than if both stayed silent.
✈️ Oligopoly strategy
In an oligopoly firms are interdependent. Airlines and phone networks use price signalling, non-price competition (branding, service) and limit pricing. The kinked demand curve explains price rigidity: rivals match price cuts but not rises. Auctions, bargaining and commitment also use game theory. Regulators look for tacit collusion.
4-firm concentration ratio = share of top 4 firms
30 + 25 + 20 + 10 = 85% → oligopoly
Ask what the rival would do. Strategic thinking begins by putting yourself in their position.
✏️ Quick check · 1 of 7
Nash
A Nash equilibrium is where:
Stable outcome.
✏️ Quick check · 2 of 7
Dominant
A dominant strategy is:
Always best.
✏️ Quick check · 3 of 7
Cartel
Cartels are unstable because:
Cheating tempts.
✏️ Quick check · 4 of 7
Repeated games
Repeated interaction can support cooperation because:
Future matters.
✍️ Type your answer · 5 of 7
In the dilemma, mutual cooperation pays (3, 3) and mutual defection pays (1, 1).
How much total payoff is lost when both defect compared with both cooperating?
Enter an exact answer, without rounding.
Compare totals.
✍️ Type your answer · 6 of 7
Four firms have market shares of 30%, 25%, 20% and 10%.
What is the four-firm concentration ratio, in %?
Enter an exact answer, without rounding.
%
Add.
✍️ Type your answer · 7 of 7
A cheat gains 5 instead of 3 for one period but then earns 1 forever instead of 3.
How much does cheating lose per later period (3 − 1)?
Enter an exact answer, without rounding.
Subtract.
📝 Lesson quiz · 5 questions
0 / 5
Re-read the lesson, then give it another go.
Question 1 of 5
Which market is most likely to show interdependence?
Question 2 of 5
A kinked demand curve implies:
Question 3 of 5
Collusion is:
Question 4 of 5
An auction is a game because:
Question 5 of 5
Which would make cooperation easier?
Lesson 3 · Macroeconomics
🌐 Global Finance & Crises
Capital flows across borders at the click of a button. This brings benefits and the risk of contagion.
💹 Financial markets and crises
Financial markets channel savings into investment and let people manage risk. Crises follow a pattern: a boom with easy credit, asset bubbles, a sudden loss of confidence and a credit crunch. Examples: the Asian crisis (1997), the Global Financial Crisis (2008, driven by US sub-prime mortgages and over-leveraged banks) and the Eurozone crisis (2010–12). Leverage magnifies gains and losses: a 10% fall in assets wipes out a bank with only 10% capital.
leverage ratio = assets / capital
assets 100, capital 5 → leverage 20
5% fall in assets = 5 → capital falls to 0
🖼️ See it
Each crisis led to new rules and institutions, from the IMF and World Bank to tougher bank regulation.
🛡️ Policy responses
Responses: central bank liquidity, bailouts and recapitalisation, QE and stimulus. Reforms: higher capital requirements (Basel III), stress tests, resolution plans and macroprudential tools. Debates: moral hazard (“too big to fail”) versus preventing collapse. Capital controls and IMF loans (with conditions) can stabilise countries but may impose austerity.
GFC: global GDP fell about 0.1% in 2009 (first fall since WWII)
US unemployment peaked ~10% in 2009
IMF: lender to countries with balance-of-payments problems
Prevention is cheaper than cure. Strong capital buffers cost less than bailouts.
✏️ Quick check · 1 of 7
Leverage
Leverage means:
Borrowed funds.
✏️ Quick check · 2 of 7
Moral hazard
Moral hazard in banking arises when:
Risk taken without cost.
✏️ Quick check · 3 of 7
Basel III
Basel III raised requirements for banks’:
Buffers.
✏️ Quick check · 4 of 7
IMF
The IMF lends to:
Governments.
✍️ Type your answer · 5 of 7
A bank has assets of 100 and capital of 5.
What is its leverage ratio?
Enter an exact answer, without rounding.
Assets ÷ capital.
✍️ Type your answer · 6 of 7
A bank has assets of 100 and capital of 5. Assets fall 5%.
What capital remains?
Enter an exact answer, without rounding.
Loss versus capital.
✍️ Type your answer · 7 of 7
US unemployment rose from 5% to 10% during the crisis.
By what percentage did the rate itself double? (percentage increase)
Enter an exact answer, without rounding.
%
Change ÷ original.
📝 Lesson quiz · 5 questions
0 / 5
Re-read the lesson, then give it another go.
Question 1 of 5
A credit crunch is:
Question 2 of 5
An asset bubble is:
Question 3 of 5
The 2008 crisis began in:
Question 4 of 5
Austerity means:
Question 5 of 5
Stress tests check whether banks:
Lesson 4 · Applied economics
🌿 Environmental & Development Economics
Economics helps value nature, price carbon and design policies for sustainable growth.
🌍 Pricing the environment
Environmental damage is a negative externality. Carbon pricing uses a carbon tax or an emissions trading system (cap and trade). The social cost of carbon estimates damage per tonne of CO₂ (commonly $50–$200). A carbon price of $50 per tonne makes coal-fired power cost more than gas or renewables and shifts investment. Valuing nature uses willingness to pay and ecosystem services. Discounting compares the present and future: a high discount rate reduces the weight of future harm.
1000 t CO₂ × $50 = $50 000 tax
present value = future value / (1 + r)^t
$1000 in 10 years at 5% → 1000 / 1.63 ≈ $614
🖼️ See it
The market ignores the pollution cost, so it produces too much (5 rather than 4). A tax equal to the external cost moves output to the efficient level.
📈 Sustainable development
Growth can decouple from emissions if output rises while emissions fall (some European countries achieved this). The environmental Kuznets curve suggests pollution first rises then falls with income, but this is true only for some pollutants. Green growth relies on efficiency, renewable energy and a circular economy. Just transition policies compensate affected workers. Climate finance helps poorer countries adapt.
emissions per $ of GDP = emissions / GDP (carbon intensity)
500 Mt / 1000 bn = 0.5 Mt per $ bn
GDP up 3%, emissions down 1% → decoupling
Discount rates are ethical choices. A low rate says future generations matter as much as we do.
✏️ Quick check · 1 of 7
Carbon tax
A carbon tax puts a price on:
Pollution.
✏️ Quick check · 2 of 7
Cap and trade
In cap-and-trade the total emissions are:
Limited total.
✏️ Quick check · 3 of 7
Decoupling
Decoupling means:
Break the link.
✏️ Quick check · 4 of 7
Discounting
A high discount rate:
Future matters less.
✍️ Type your answer · 5 of 7
A carbon tax of $50 per tonne is applied to 1000 tonnes of CO₂.
How much tax is paid, in $?
Enter an exact answer, without rounding.
$
Multiply.
✍️ Type your answer · 6 of 7
A country emits 500 Mt CO₂ with GDP of 1000 billion dollars.
What is the carbon intensity, in Mt per $ billion?
Enter an exact answer, without rounding.
Mt/$bn
Divide.
✍️ Type your answer · 7 of 7
A $1000 payment in 10 years has a present value of $614 at 5%. A $1000 loss now is $1000.
How many dollars higher is the loss now than the discounted future loss?
Enter an exact answer, without rounding.
$
Subtract.
📝 Lesson quiz · 5 questions
0 / 5
Re-read the lesson, then give it another go.
Question 1 of 5
The social cost of carbon estimates:
Question 2 of 5
Ecosystem services include:
Question 3 of 5
A circular economy:
Question 4 of 5
A just transition protects:
Question 5 of 5
The environmental Kuznets curve suggests pollution:
Lesson 5 · Skills
📐 Economic Data & Evaluation
Economists test ideas with data. Good analysis combines theory, evidence and careful evaluation.
📊 Working with data
Key tools: percentage change = (new − old) ÷ old × 100; index numbers (base year = 100); real vs nominal values; averages (mean, median); and correlation. A regression estimates the relationship between variables (y = a + bx). Beware of causation vs correlation, omitted variables and selection bias. Randomised controlled trials (RCTs) test policies, awarded the 2019 Nobel Prize (Banerjee, Duflo, Kremer).
index: base 100, now 125 → up 25%
real = nominal / (price index / 100)
$1100 with index 110 → $1000 real
y = 5 + 2x; x = 10 → y = 25
🖼️ See it
Real GDP = nominal GDP ÷ price index × 100. Nominal GDP rose 10% but about half of that was inflation, so output grew only 4.8%.
🧪 Evaluating policies
When evaluating a policy ask: Is it effective? Efficient? Fair? Feasible? Consider short vs long run, winners and losers, unintended consequences, opportunity cost and magnitude of effects. Use cost–benefit analysis and discuss uncertainty. Strong essays define, apply theory to context, analyse chains of reasoning, evaluate with judgement and conclude clearly.
minimum wage rise: wage +10%, employment −1%
elasticity ≈ −0.1 → small job loss for large pay gain
If 80% of workers get higher pay and 1% lose jobs, net gain is large
Always evaluate: “it depends on…” followed by a judgement beats a list of facts.
✏️ Quick check · 1 of 7
Index
In an index number series the base year is set to:
A round number.
✏️ Quick check · 2 of 7
Real value
To find the real value you:
Remove price effects.
✏️ Quick check · 3 of 7
Correlation
Correlation does not prove:
Cause.
✏️ Quick check · 4 of 7
RCT
A randomised controlled trial helps by:
Experiments.
✍️ Type your answer · 5 of 7
A price index rises from 100 to 125.
What is the percentage increase?
Enter an exact answer, without rounding.
%
Change ÷ base.
✍️ Type your answer · 6 of 7
Nominal income is $1100 and the price index is 110.
What is the real income, in $?
Enter an exact answer, without rounding.
$
Divide by index ÷ 100.
✍️ Type your answer · 7 of 7
A regression gives y = 5 + 2x.
What is y when x = 10?
Enter an exact answer, without rounding.
Substitute.
📝 Lesson quiz · 5 questions
0 / 5
Re-read the lesson, then give it another go.
Question 1 of 5
Selection bias occurs when:
Question 2 of 5
An omitted variable is:
Question 3 of 5
Good evaluation includes:
Question 4 of 5
The median is useful for income because it:
Question 5 of 5
A cost–benefit analysis compares:
Final Challenge
🏆 10-Question Challenge Quiz
Questions from every topic in this course. Pick an answer for each one, then hit Check My Answers.
0 / 10
💪 Keep practicing — go back through the lessons and retake the quiz!
Q1 · Behavioural Economics
Behavioural economics challenges the assumption that people are:
Q2 · Behavioural Economics
A criticism of nudges is:
Q3 · Game Theory & Strategy
The prisoner’s dilemma shows that individual rationality can:
Q4 · Game Theory & Strategy
Which would make cooperation easier?
Q5 · Global Finance & Crises
A reason capital flows can destabilise small economies is that:
Q6 · Global Finance & Crises
Stress tests check whether banks:
Q7 · Environmental & Development Economics
Putting a price on carbon helps because it:
Q8 · Environmental & Development Economics
The environmental Kuznets curve suggests pollution:
Q9 · Economic Data & Evaluation
Which phrase best signals evaluation in an economics essay?