UNIT I

Game Theory
Game theory is the study of strategic decision-making where the outcome for each
participant depends on the choices of all involved. It analyzes how individuals or groups
make decisions in competitive situations to maximize their benefits or minimize their losses.

Objective of Game Theory: To analyze and predict the optimal strategies in competitive
situations where outcomes depend on the actions of multiple participants.

Rules:
1. At Least 2 Players: The game involves a minimum of two participants or players.
2. Known Alternatives: Each player has a set of choices or strategies, and these are
known to all players.
3. Simultaneous Choices: Players choose their actions at the same time without knowing
the other players’ choices.
4. Payoff for Each Action: Each combination of choices results in a payoff or outcome for
each player.
5. Rational Opponents: Players are rational and make decisions to maximize their own
benefits while considering the conflicting interests of others.
6. Minimize Losses: Players aim to minimize their possible losses.
7. Zero-Sum: A win for one player results in an equal loss for the other(s).

Terminologies:
1. Zero-sum game: A zero-sum game is a situation in which one player's gain is exactly equal
to another player's loss. The total amount of resources or rewards remains constant, so any
advantage for one participant comes at the expense of another.
2. Non- zero sum game: A non-zero-sum game is a situation where the outcome can result
in gains or losses for all players involved. The total amount of resources or rewards can
increase or decrease, meaning it's possible for everyone to win or lose together, not just one
person's gain at another's expense.
3. 2 player game: A 2-player game is a situation where two participants or players make
decisions and interact with each other, with the outcome depending on the choices both
players make. The game involves strategies where each player tries to achieve the best
possible result based on the other's actions.
4. N-player game: An n-player game is a situation where more than two participants (n
players) are involved, and each player’s decisions affect the outcomes for everyone. The
game involves strategies where all players interact, and the result depends on the actions of
all involved.
5. Saddle point: A saddle point is a spot in a game where both players have the best possible
strategy. For one player, it's the highest payoff they can secure, and for the other, it's the
lowest loss they can protect against. At this point, neither player benefits from changing
their strategy.
6. Strategy: A strategy is a plan or set of actions a player follows in a game or situation to
achieve the best possible outcome. It’s how a player decides to act based on the options
available and what they think others might do.
7. Pure Strategy Game: A pure strategy game is a game where each player consistently
follows a single, specific strategy. They choose one clear plan of action and stick to it
throughout the game, without changing their approach based on others’ actions.
8. Mixed Strategy Game: A mixed strategy game is a game where players choose between
different strategies randomly or with certain probabilities. Instead of sticking to one fixed
plan, they vary their actions, making their choices less predictable.
9. Deterministic Game: A deterministic game is a game where the outcomes are entirely
predictable, with no randomness involved. The result of the game is determined solely by
the players' actions, and the same actions will always lead to the same outcome.
10. Payoff: Payoff is the result or benefit gained from a particular decision or action in a
game or situation. It represents the outcome or reward a player receives based on their
choices and the choices of others.
11. Opportunity Matrix: An opportunity payoff matrix is a table that shows the potential
benefits or opportunities from different choices or actions. It helps in comparing how
various options might lead to different outcomes, allowing you to choose the best
opportunity.
12: Cost Matrix: A cost payoff matrix is a table that shows the costs associated with different
decisions or actions. It helps in comparing how various choices affect expenses, allowing you
to choose the option that minimizes costs.
13. Profit Payoff Matrix: A profit payoff matrix is a table that shows the potential profits for
different combinations of strategies chosen by players in a game or business scenario. It
helps in comparing outcomes and deciding the best strategy to maximize profits.
Quantitative Techniques:
Quantitative techniques are methods that use mathematical and statistical tools to analyze
data, solve problems, and make decisions. They involve numerical data and models to
understand patterns, forecast outcomes, and optimize processes.
Quantitative techniques are methods that use numbers and math to analyze data, solve
problems, and make decisions. They help in understanding patterns and predicting
outcomes using calculations and statistics.

Methodology of Quantitative Techniques:

1. Formulate Problem: Identify and clearly describe the problem you need to solve.
2. Define Decision Variables and Constraints: Determine what variables you can control and
the limits or rules you need to follow.
3. Develop a Suitable Model: Create a mathematical model that represents the problem and
its constraints.
4. Acquire the Input Data: Gather the necessary data and information needed to use the
model.
5. Solve the Model: Use mathematical methods to find the best solution based on the
model and data.

Model:
A model is a simplified version of something that helps us understand, explain, or predict
how it works. It can be a physical object, a drawing, a set of equations, or a computer
simulation that represents a real-world system or idea.

Steps in Model Building:

1. Define the Problem: Clearly identify and describe the issue you want to solve.
2. Identify Variables: Determine what factors or variables will be part of the model.
3. Develop the Model: Create a simplified version of the real system using equations or
diagrams.
4. Collect Data: Gather the necessary information to use in the model.
5. Test the Model: Run simulations or experiments to check if the model works correctly.
6. Analyze Results: Review the outcomes to see if they help solve the problem.
 7. Refine the Model: Make adjustments to improve accuracy or functionality based on
the results.
Mathematical Models:
Mathematical models are simplified representations of real-world situations using math.
They use equations and formulas to describe and analyze relationships between different
variables, helping to understand and predict outcomes.

Types Of Models:
• Scale Up Model: A model that shows a larger version of something, often used to
predict how a small-scale system behaves when increased in size.
• Scale Down Model: A model that represents a smaller version of something, used to
study large systems in a more manageable size.
• Symbolic/Mathematical Model: Uses symbols, equations, and formulas to represent
and analyze a system or problem.
• Physical Model: A tangible, three-dimensional model that you can touch and see, like
a model of a building or a model car.
• Iconic Model: A simplified visual representation or diagram that resembles the real
thing, like a map or a blueprint.
• Analogue Model: Represents a system by using something similar that behaves in a
comparable way, like using water flow to model electrical circuits.

Types of Mathematical Models:

1. Deterministic Models: These models provide exact outcomes based on fixed inputs and
assumptions. There’s no uncertainty; given the same inputs, you always get the same result.
Example: A recipe for baking a cake is deterministic. If you use the same ingredients and
follow the same steps, you’ll always get the same result—a cake.
2. Probabilistic Models: These models account for uncertainty and randomness. They use
probabilities to predict different possible outcomes, acknowledging that results can vary
even with the same inputs.
Example: Weather forecasting is probabilistic. Even with the same data, the forecast might
predict different weather outcomes due to the uncertainty in weather patterns.