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

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

Survey Questions

Have you ever worked in a restaurant? 1.Yes 2.No

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.

Clicker Check-in Survey Do you own an Ipod? 1.Yes 2.No Asked in Jan, 2006 Asked again in Jan, % yes, 25% no Next class: Iphones

The National Market

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?

Willingness to pay for an IPOD

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

Which price maximizes revenue? 1. $ $ $ $ $200 6.$150

Price and Revenue

Total Revenue and quantity

If Marginal cost is $50, which price maximizes Apple’s profits on IPod? 1.$350 2.$300 3.$250 4.$200 5.$150

Profit with $50 Marginal Cost per unit

Profit with $100 Marginal Cost per unit

Profit with $50 Marginal Cost: Wholesale price 80% of retail

Demand Curve for Ipods

Elasticity along demand curve

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. 1.$40,000 or more 2.$30,000 3.$25,000 4.$20,000 5.$15,000 6.$10,000 7.$8,000 8.$5,000 9.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?

Questions on Course Material

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.

If the supply curve is horizontal, a $10 increase in the sales tax will cause the equilibrium after tax price to rise by 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 $5 3.By $20 4.By $0

Looking pretty good Maybe they are learning something. Let’s try another one.

A profit maximizing firm will choose the amount of labor that maximizes the marginal value product of labor. 1.True 2.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. workersv.outputMVPProfits 1$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.

Classroom Games

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.

Equilibrium Analysis

This time I will travel by the 1.Short way 2.Freeway

Traffic Cycles?

Commuting time: time series

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: miles miles miles miles miles miles miles miles miles

The distance (as the crow flies) from Paris, France to Vienna, Austria is in the range of: miles miles miles miles miles miles miles miles miles

The distance (as the crow flies) from Paris, France to Vienna, Austria is in the range of: miles miles miles miles miles miles miles miles miles

What is it exactly? 642 miles

Had enough? OK, I’m Done