Tuesday, April 11, 2006

The OC

No, not the Fox network television show. I'm talking the real, the important, the big OC--opportunity cost.

I firmly believe this is one of the most fundamental and important concepts in teaching economics. Students can generally grasp it and parrot back an answer. But do they understand it? Do they internalize it? Do they think it? Evidently the answer may be "no".

Take a look at this entry by Michael Munger at the Library of Economics and Liberty blog. His example from an old exam is good, but his discussion on how people think is particularly interesting, particularly how we seem to differentiate between gains and losses.

This seems to match my experience. What about your students?

Posted by TSchilling at April 11, 2006 7:40 PM

Opportunity cost is a useful idea but it is appallingly ill-defined, so much so that even graduate students don't get it, as Marginal Revolution discussed last year. Why is it so badly taught? We would do a much better job if we used decision-tree analysis. We should show there is an explicit list of options, from which we choose the best one. Then it is easy to see what the OC is. For an excellent take on this, I highly recommend www.smallparty.org which teaches intro micro in a way that is superior to any of the textbooks such as Mankiw.

Posted by: PEmberton at May 1, 2006 1:14 AM

I agree. In fact, when introducing the concept of opportunity cost to teachers at the early elementary level, a decision-tree is the best way for the very young students to understand the concept. The "tree" has only two branches and this makes it easy for the very young to identify what was given up. It's a fine way to introduce the concept at that age. And the tree is always helpful at any age, imho.

Posted by: Tim at May 2, 2006 5:44 PM

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