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Teaching Economics Interactively: A Cannibal’s Dinner Party
Hillsdale College Free Market Forum
Ted Bergstrom, UCSB
What I tell my Principles Students
• “Taking this course is like being invited to dinner at a cannibal’s house. ‘’
• ``You may be a diner, you may be dinner…
• And you probably will be both’’
A Cannibal’s Feast
• Unlike astronomers, physicists, geologists, botanists, or even biologists, we have direct
experience with being the object we study.• ``Economics is the study of mankind in the
ordinary business of life.’’---Alfred Marshall• The classroom is a natural laboratory for study
of interacting human decisions…as well as a place to learn economics.
Two Interactive Devices
• Classroom Market Experiments in TA Sections.
• Radio Frequency Clickers in large lectures.
Principles class has 500+ students. Sections have 35-50.
Classroom Experiments• Each week students participate in a market
experiment in the TA section.• Experiment illustrates economic principles
studied in that week.• Each student’s trades and profits are recorded.
(Profits count slightly toward grade.)• Data from experiment is posted on web. • Homework assignment: Process data from
experiment and compare experimental results with theoretical predictions.
Classroom lectures
• In large lecture we discuss the theory related to the experiment.
• We see how well the theory predicts experimental results.
• Important lesson: Distinguish Predictions from observations.
• We look at real world ``natural experiments’’ that illustrate the theory.
Pedagogical objectives
Persuade students that economics is not dogma to memorize, but tools for thinking about what goes on in the world.
Teach them the usefulness of simple theories and the difference between theory and observation.
Experimental topics
• Demand and Supply (and shifts in these)• Sales tax incidence• Price Floors and Ceilings• Externalities• Equilibrium with entry and exit of firms• Monopoly and Oligopoly• Comparative Advantage• Adverse Selection and Lemons
Supply and Demand Experiments
• Each student assigned a role as buyer or seller.• Buyers can buy at most one unit, sellers can sell
at most one unit.• Each buyer is assigned a Buyer Value and each
seller a Seller Cost. Students know only their own Value or Cost. Instructor knows distribution.
• Students trade in an open ``trading pit.’’ Seek most profitable deal they can find. Do not have to trade if they cannot make profit.
Theoretical Prediction
• After experiment is over, students are told the distribution of Buyer Values and Seller Costs.
• They are asked to construct a supply curve and a demand curve and to find the competitive equilibrium price.
• In homework, they compare the prices and quantities in the experimental outcome to the predictions of competitive theory.
Radio Frequency Clickers
• Each student has a clicker.• Questions are posted on screen at front of
lecture hall.• Students respond with a letter or number.• Software records individual responses.
Clicker Applications
• Surveys of characteristics or opinions– Develop demand and supply curves to work with
as homework exercises
• Questions testing understanding of material– Inform me of what students know– Inform students of what I want them to know– Inform students of what the others know.
• Classroom games and markets
Do you have a job during the school year?
1. No.2. Yes, less than 10
hours per week.3. Yes, between 10
and 20 hours per week.
4. Yes, 20 or more hours per week.
No.
Yes
, les
s th
an 1
0 ho
u..
Yes
, bet
ween 1
0 an
d ..
Yes
, 20
or m
ore h
our...
69%
10%14%
6%
Clicker Check-in Survey Do you own an Ipod?
80%
20%
1. Yes2. No
Asked in Jan, 2006
Asked again in Jan, 2007
75% yes, 25% no
Next class: Iphones
Estimating a Demand Function
Question:
What is the most that would you be willing to pay for an IPOD if you couldn’t get it any cheaper than that?
Homework assignment
• Students were given an Excel spreadsheet with the distribution of willingnesses to pay.
• They were told that I would ask the following clicker questions in class next time.
What price maximizes revenue?If marginal cost is $50, what price maximizes
profit?If marginal cost is $100, what price maximizes
profit?
Total Revenue Maximization
Buyer Pct of Value class Revenue
700 6 4200500 4 5000450 2 5400400 5 6800350 9 9100300 20 13800250 12 14500200 16 14800150 16 13500
50 10 5000
Which price maximizes revenue?
450
350
300
250
200
150
1%4%
0%
69%
7%
19%
1. $4502. $3503. $3004. $2505. $2006. $150
Price and Revenue
0
2000
4000
6000
8000
10000
12000
14000
16000
0 100 200 300 400 500 600 700 800
Price
Rev
enu
e
Total Revenue and quantity
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
0 20 40 60 80 100
If Marginal cost is $50, which price maximizes Apple’s profits on IPod?
350
300
250
200
150
1%
14%
0%
8%
77%
1. $3502. $3003. $2504. $2005. $150
Profit with $50 Marginal Cost per unit
BuyerPct of Quantity Var.Valueclass Price DemandedRevenue Cost Profit
700 6 4200 300 3900
500 10 5000 500 4500
450 12 5400 600 4800
400 17 6800 850 5950
350 26 9100 1300 7800
300 46 13800 2300 11500
250 58 14500 2900 11600
200 74 14800 3700 11100
150 90 13500 4500 9000
50 100 5000 5000 0
Profit with $100 Marginal Cost per unit
BuyerPct of Quantity Var.Valueclass Price DemandedRevenue Cost Profit
700 6 4200 600 3600
500 10 5000 1000 4000
450 12 5400 1200 4200
400 17 6800 1700 5100
350 26 9100 2600 6500
300 46 13800 4600 9200
250 58 14500 5800 8700
200 74 14800 7400 7400
150 90 13500 9000 4500
50 100 5000 10000 -5000
Profit with $50 Marginal Cost:Wholesale price 80% of retail
Quantity 80% of Var.DemandedRevenuerevenueCost Profit
6 4200 3360 300 3060
10 5000 4000 500 3500
12 5400 4320 600 3720
17 6800 5440 850 4590
26 9100 7280 1300 5980
46 13800 11040 2300 8740
58 14500 11600 2900 8700
74 14800 11840 3700 8140
90 13500 10800 4500 6300
100 5000 4000 5000 -1000
Elasticity along demand curve
Price Quantity Elasticity=(P/Q)(DQ/DP)700 6 -2.3500 10 -2.0450 12 -3.8400 17 -4.2350 26 -5.4300 46 -1.6250 58 -1.4200 74 -0.9150 90 -0.250 100
Elasticity of Demand vs Price
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
$0 $200 $400 $600 $800
Price
Ela
stic
ity
of
Dem
and
What is the highest tuition at which you would have still chosen UCSB?
Tuition and fees at UCSB is about $7600 for residents and
$25000 for nonresidents.
$40
,000 o
r more
3000
0
2500
0
2000
0
1500
0
1000
080
0050
00
Les
s th
an $
5,000
5%
7%
14%
11%
2%2%
16%
23%
20%1. $40,000 or more2. $30,0003. $25,0004. $20,0005. $15,0006. $10,0007. $8,0008. $5,0009. Less than $5,000
Labor Supply Question
• What is the lowest hourly wage at which you would take a 10 hour per week part time job during the school year?
The effect on price of a sales tax collected from buyers is the same as
the effect of
1. An upward shift of the demand curve.
2. A downward shift of the demand curve .
3. An upward shift of the supply curve.
4. A downward shift of the supply curve.
An u
pward s
hift o
f t..
A d
ownwar
d sh
ift o
f ...
An u
pward s
hift o
f t..
A d
ownwar
d sh
ift o
f t..
3% 1%3%
93%
If the supply curve is horizontal, a $10 increase in the sales tax will
cause the equilibrium after tax price to rise by
By
$10.
By
less
than
$10
.
By
mor
e th
an $
10.
88%
2%10%
1. By $10.2. By less than $10.3. By more than $10.
The demand curve has slope –1 and the supply curve has slope +2. A sales tax causes the after tax price to
buyers to rise by $10. The after tax price received by sellers must have fallen
1. By $10 2. By $53. By $204. By $0
By
$10
By
$5
By
$20
By
$0
15%
5%
27%
53%
A profit maximizing firm will choose the amount of labor that maximizes the
marginal value product of labor.
Tru
e
Fal
se
17%
83%
1. True2. False
• To maximize Marginal Value Product hire 1• To maximize profits, hire 3.• What does Marginal value product rule say?• Hire additional labor so long as marginal value
product exceeds the wage.
workers v.output MVP Profits
1 $200 $200 $175
2 $300 $100 $250
3 $350 $50 $275
4 $360 $10 $260
Example: Wage is $25
Worse than a roomful of monkeys?
• If you want to deflate your opinion of your teaching prowess, ask your students a variant of this question.– Monopolists seek to maximize their marginal
revenue or – Competitive firms seek to maximize the
difference between price and marginal cost.
• Students are not used to careful use of language.
A commuting game.
• You have two ways to commute from home to work. – The short way by narrow road– The long way by freeway
• Commute time by freeway is always 30 minutes.
• Commute time by narrow road depends on how many others take narrow road.
Your choice
• If N people go short way, it takes 15+N/10 minutes to make the trip.
• Freeway always takes 30 minutes• You hate commuting and want to minimize travel time.• Choose your route using Clickers. We’ll do this
repeatedly, simulating commuter days.
Your score for the day.
• You will get more points, the less your total time spent commuting.
• You must choose one way or the other. If you don’t click either option, you will be assessed 1 hours commuting time for that day.
The wisdom of Crowds?
• We can ask a question repeatedly, displaying the histogram of answers after each set of responses.
• How useful is group consensus about facts?
I think the distance (as the crow flies) from Paris, France to Vienna, Austria
is in the range of:
200
0-250
0 m
iles
120
0-200
0 m
iles
900
-120
0 mile
s
700
-900
mile
s
600
-700
mile
s
500
-600
mile
s
400
-500
mile
s
300
-400
mile
s
200
-300
mile
s
3%
8%
13%
24%
2%
4%
12%
16%
18%
1. 2000-2500 miles2. 1200-2000 miles 3. 900-1200 miles4. 700-900 miles5. 600-700 miles6. 500-600 miles7. 400-500 miles8. 300-400 miles9. 200-300 miles
The distance (as the crow flies) from Paris, France to Vienna, Austria is in
the range of:
200
0-250
0 m
iles
120
0-200
0 m
iles
900
-120
0 mile
s
700
-900
mile
s
600
-700
mile
s
500
-600
mile
s
400
-500
mile
s
300
-400
mile
s
200
-300
mile
s
1% 1%
6%
59%
0%1%
5%
8%
18%
1. 2000-2500 miles2. 1200-2000 miles 3. 900-1200 miles4. 700-900 miles5. 600-700 miles6. 500-600 miles7. 400-500 miles8. 300-400 miles9. 200-300 miles
The distance (as the crow flies) from Paris, France to Vienna, Austria is in
the range of:
200
0-250
0 m
iles
120
0-200
0 m
iles
900
-120
0 mile
s
700
-900
mile
s
600
-700
mile
s
500
-600
mile
s
400
-500
mile
s
300
-400
mile
s
200
-300
mile
s
0% 1%
6%
62%
0%1%4%
6%
20%
1. 2000-2500 miles2. 1200-2000 miles 3. 900-1200 miles4. 700-900 miles5. 600-700 miles6. 500-600 miles7. 400-500 miles8. 300-400 miles9. 200-300 miles