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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
Survey Questions
Have you ever worked in a
restaurant?
66%
o
N
s
34%
Ye
1. Yes
2. No
Do you have a job during the school
year?
69%
14%
10%
ur
...
d
ho
an
m
or
e
10
or
20
s,
Ye
s,
Ye
s,
le
s
s
be
tw
ee
n
th
an
10
N
ho
u
..
..
o.
6%
Ye
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
80%
Asked in Jan, 2006
Asked again in Jan, 2007
20%
75% yes, 25% no
o
N
Ye
s
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?
or
$3
00
)
$2
50
)
$4
00
)
$3
50
)
$5
00
)
$4
50
)
m
or
e
6%
$2
00
)
$1
$1
50
00
)
or
le
ss
$6
00
Willingness to pay for an IPOD
20%
16%
16%
12%
10%
9%
5%
4%
2%
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?
Which price maximizes revenue?
69%
$450
$350
$300
$250
$200
$150
19%
7%
4%
0
15
0
20
0
25
0
30
0
0%
35
0
1%
45
1.
2.
3.
4.
5.
6.
Total Revenue Maximization
Buyer
Pct of
Value
class Revenue
700
6
4200
500
4
5000
450
2
5400
400
5
6800
350
9
9100
300
20
13800
250
12
14500
200
16
14800
150
16
13500
50
10
5000
Price and Revenue
16000
14000
Revenue
12000
10000
8000
6000
4000
2000
0
0
100 200 300 400 500 600 700 800
Price
Total Revenue and quantity
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
0
20
40
60
80
100
If Marginal cost is $50, which price
maximizes Apple’s profits on IPod?
77%
$350
$300
$250
$200
$150
14%
8%
0
15
0
20
0
25
0
0%
30
0
1%
35
1.
2.
3.
4.
5.
Profit with $50 Marginal Cost per unit
Buyer
Pct of Quantity
Var.
Value
class
Price Demanded
Revenue 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
Buyer
Pct of Quantity
Var.
Value
class
Price Demanded
Revenue 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.
Demanded
Revenue
revenueCost
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
Demand Curve for Ipods
$800
$700
$600
$500
$400
$300
$200
$100
$0
0
20
40
60
80
100
Elasticity along demand curve
Price
Quantity
700
500
450
400
350
300
250
200
150
50
6
10
12
17
26
46
58
74
90
100
Elasticity=(P/Q)(DQ/DP
-2.3
-2.0
-3.8
-4.2
-5.4
-1.6
-1.4
-0.9
-0.2
Elasticity of Demand vs Price
0.0
Elasticity of Demand
$0
$200
$400
-1.0
-2.0
-3.0
-4.0
-5.0
-6.0
Price
$600
$800
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
.
23%
20%
16%
14%
11%
7%
5%
2%
$5
,0
00
50
00
Le
ss
th
an
80
00
10
00
0
20
00
0
15
00
0
30
00
0
25
00
0
m
or
e
2%
or
$40,000 or more
$30,000
$25,000
$20,000
$15,000
$10,000
$8,000
$5,000
Less than $5,000
$4
0,
00
0
1.
2.
3.
4.
5.
6.
7.
8.
9.
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.
93%
ft
..
sh
ift
w
ar
d
sh
w
ar
d
ift
o
f.
..
of
t..
3% 1%
ift
o
ar
d
w
w
ar
d
sh
sh
ift
of
t..
3%
If the supply curve is horizontal, a
$10 increase in the sales tax will
cause the equilibrium after tax price
to rise by
88%
1. By $10.
2. By less than $10.
3. By more than $10.
2%
an
$1
0.
0.
$1
an
y
$1
0.
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
53%
By $10
By $5
By $20
By $0
27%
15%
B
y
$0
0
$2
y
$5
y
B
$1
0
5%
y
1.
2.
3.
4.
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.
83%
1. True
2. False
ls
e
Fa
Tr
ue
17%
Example: Wage is $25
workers
1
2
3
4
•
•
•
•
v.output
$200
$300
$350
$360
MVP
$200
$100
$50
$10
Profits
$175
$250
$275
$260
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.
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
Commuting Times
60
Freeway
50
Minutes
40
30
1
20
10
0
0
50
100
150
200
Number taking short way
300
350
400
450
Shortway
This time I will travel by the
266
205
ay
w
Fr
ee
Sh
or
tw
ay
1. Short way
2. Freeway
Traffic Cycles?
Number Choosing Short Way
300
250
Number
200
150
100
50
0
1
2
3
4
Day
5
6
7
Commuting time: time series
Commuting Times
45
40
35
Minutes
30
25
Freeway
20
15
10
5
0
1
2
3
4
Day
5
6
7
Short way
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:
2000-2500 miles
1200-2000 miles
900-1200 miles
700-900 miles
600-700 miles
500-600 miles
400-500 miles
300-400 miles
200-300 miles
24%
18%
16%
13%
12%
8%
3%
4%
2%
20
00
-2
50
0
12
m
00
ile
-2
s
00
0
90
m
ile
012
s
00
m
70
ile
0s
90
0
m
60
ile
0s
70
0
m
50
ile
0s
60
0
m
40
ile
0s
50
0
m
30
ile
0s
40
0
m
20
ile
0s
30
0
m
ile
s
1.
2.
3.
4.
5.
6.
7.
8.
9.
The distance (as the crow flies) from
Paris, France to Vienna, Austria is in
the range of:
59%
2000-2500 miles
1200-2000 miles
900-1200 miles
700-900 miles
600-700 miles
500-600 miles
400-500 miles
300-400 miles
200-300 miles
18%
8%
6%
1%
1%
5%
1%
0%
20
00
-2
50
0
12
m
00
ile
-2
s
00
0
90
m
ile
012
s
00
m
70
ile
0s
90
0
m
60
ile
0s
70
0
m
50
ile
0s
60
0
m
40
ile
0s
50
0
m
30
ile
0s
40
0
m
20
ile
0s
30
0
m
ile
s
1.
2.
3.
4.
5.
6.
7.
8.
9.
The distance (as the crow flies) from
Paris, France to Vienna, Austria is in
the range of:
2000-2500 miles
1200-2000 miles
900-1200 miles
700-900 miles
600-700 miles
500-600 miles
400-500 miles
300-400 miles
200-300 miles
62%
20%
6%
0%
1%
6%
4%
1%
0%
20
00
-2
50
0
12
m
00
ile
-2
s
00
0
90
m
ile
012
s
00
m
70
ile
0s
90
0
m
60
ile
0s
70
0
m
50
ile
0s
60
0
m
40
ile
0s
50
0
m
30
ile
0s
40
0
m
20
ile
0s
30
0
m
ile
s
1.
2.
3.
4.
5.
6.
7.
8.
9.
What is it exactly? 642 miles