Download Chapter 2

Chapter 2
An Introduction to Economic Systems and the Workings
of the Price System
Activity 2.1
Getting Dressed in the Global Economy
Type:
Topics:
In-class activity and discussion
specialization, interdependence, self-interest, consumer
choice, international linkages
None
20 minutes
Works in any size class
Materials:
Time:
Class limitations:
PURPOSE
The advantages of specialization and division of labor are very clear in this example. The
worldwide links of the modern economy are also illustrated. We depend on thousands of people
we don't know, won't see, and don't think of in order to get dressed in the morning. Self-interest
follows naturally from interdependence. Wages, profits, and rent give people the incentive to
perform these varied tasks. We depend on them to clothe us, and they depend on our purchases
for their income.
INSTRUCTIONS
Ask the class to answer the following questions below. Give them time to write an answer to a
question, then discuss their answers before moving to the next question. Question 1 can be
answered with a brief phrase. Question 2 is the core of the assignment and takes several minutes.
Ask students to list as many categories of workers as possible. (Offering a dollar to the first
student to list 20 categories adds a competitive element.) Question 3 introduces demand
concepts; most of the determinants of demand can be introduced during its discussion. For
Question 4, ask the class to look at the country-of-origin tags sewn in their garments.
1) Where did your clothes come from?
2) Who worked to produce your clothes?
3) What factors do you consider when buying a garment?
4) Where were your clothes produced (what countries)?
COMMON ANSWERS AND POINTS FOR DISCUSSION
1) Where did your clothes come from?
There are many possible ways to answer this question, but most students will likely say "the
mall," "Old Navy," "Wal-Mart," or another retail outlet. Some may say "a factory," "a
sweatshop," or "a foreign country."
Mention the importance of markets here. This can be emphasized by asking: "Is anyone wearing
something made by a friend or relative?" Discuss distribution versus production.
2) Who worked to produce your clothes?
There is no end to the possible answers. Garment and textile workers are obvious, but most
students will also list raw materials, transportation, management, design, or machinery. Some
students may think more broadly to inventors, road crews, bankers, oil refiners, engineers, and
accountants.
Three important points are: specialization, interdependence, and self-interest.
3) What things do you consider when buying a garment?
Most answers will focus on preferences (fit, style, quality, and color). Price is cited less
frequently. Ask about the importance of price until someone volunteers that income is important
and the prices of substitute goods are important. Expectations of price change (e.g., clearance
sales) can also be discussed. Few students will mention complementary goods, and most will
reject the idea of choosing a sweater to match a particular outfit. More convincing sets of
complements involve activities and garments: skiing and insulated overalls, surfing and wetsuits,
aerobics and spandex.
4) Where were your clothes produced (what countries)?
A large number of countries will be represented, even in small classes. Students are usually
surprised to find how many garments are domestically produced. Asia is always well
represented. Latin American and European goods appear in smaller numbers. African products
are conspicuously absent.
This pattern shows the limits of simple explanations such as "cheap labor." Briefly discuss the
importance of comparative advantage, specialization, exchange rates, and tariffs and quotas.
Activity 2.2
A Market Example
Type:
Topics:
In-class demonstration
individual demand, market demand, equilibrium price,
allocation
A bag of Pepperidge Farm’s cookies (15 cookies), five volunteers
35 minutes
Works in large lectures or small classes with over 15 students
Materials:
Time:
Class limitations:
PURPOSE
This is an example of a real world market, where real goods are exchanged for real money. It is a
free market so there will be no coercion, but participants should think carefully about their
answers since actual trades will take place.
INSTRUCTIONS
Ask for five volunteers to participate in a market for Pepperidge Farm’s Milano cookies. Read
some of the package copy describing these "distinctively delicious" cookies. Write each
volunteer's name on the board.
Ask the volunteers how many cookies they would be willing to buy at various prices. Record
these prices and quantities.
Give the volunteers the opportunity to revise their numbers if the figures don't accurately reflect
their willingness to pay. Remind them this isn't a hypothetical exercise, and they will have to pay
real money.
At this point there will be five individual demand curves which should be graphed, if desired.
Students will benefit from repeated exposure to graphs and graphing techniques.
Add the individual quantities at each price to find the market demand at that price. This overall
demand is used to find the market equilibrium. Sketch a graph of the market demand.
Supply, in this case, is fixed at the number of cookies in the bag. There are 15 cookies. No more
can be produced, and any leftovers will spoil. This gives a vertical supply curve in the very short
run at Q=15. [Sketch the supply curve.]
Try various prices until the individual quantities sum to 15. This will give the equilibrium price
and quantity.
Distribute the cookies and collect money from each participant.
An example:
1) How many of these cookies, if any, would you be willing to buy at a price of $10
per cookie?
2) How many cookies, if any, would you be willing to buy at a price of $0.25 per cookie?
3) How many cookies, if any, would you be willing to buy at a price of $0.50 per
cookie?
4) How many cookies, if any, would you be willing to buy at a price of $0.01 per
cookie?
Make a chart like the one below and tell students: Our volunteers gave the responses below. The
market quantity is the sum of the individual quantities at each price.
Price
Maria
Ricardo
Amy
Jamal
$10
0.50
.25
0.01
0
0
1
6
0
2
4
100
0
1
2
50
0
3
4
25
Market
Quantity
0
6
11
181
Now let's look at the intersection of this supply curve with the market demand curve to find our
equilibrium point. In this example, our equilibrium will occur at some price below 25¢ and above
1¢.
For Example:
Price
Maria
Ricardo
Amy
Jamal
$0.20
2
5
3
5
Market
Quantity
15
This is the equilibrium price. At this price the market clears. Once the price is established, we
allocate the goods based on individual demand, so Maria buys two cookies at 20¢ each, Ricardo
buys five cookies, Amy three, and Jamal five.
POINTS FOR DISCUSSION
The demand curves display the typical inverse relation between price and quantity. [Remark on
any unusual patterns.] These tell us about each individual's willingness to pay and reveal
information about the marginal benefits of additional cookies to each consumer.
Market demand is aggregated from individual demand curves.
Notice the consumers do not get an equal number of cookies. This is typical of markets since
tastes and incomes vary across individuals.
Also notice that the total cost to the consumers is equal to the total revenue to the firm, Price
times Quantity.
Activity 2.3
Students & Prices
Type:
Topics:
Materials:
Class limitations:
Take-home assignment
consumer choice, prices
"Prices" Worksheet
Works in any size class
PURPOSE
This activity is most useful in setting up an interesting discussion later in the semester. It relates
to the price system discussion of Chapter 2. In Chapter 15, this activity gives students a practical
look at how price indices are measured. It also establishes base prices for calculating inflation
rates later in the term. (See Activity 15.3--Changes in the Student Price Index.)
INSTRUCTIONS
Students should pick real transaction prices for goods they actually purchase. If the indices will
be used to calculate inflation rates, they should save a copy of this assignment. They should not
use prices from catalogs since they won't be subject to change over the semester.
POINTS FOR DISCUSSION
For Chapter 2, the discussion around this activity should relate to the price system. Ask students
questions like:
1) What factors could lead to a change in these prices?
2) What information can we learn from these prices?