Monday, April 24, 2006

Teaching about Price: Using Oil (Part II)

In one of my first entries last September, I reflected on gasoline prices and how educators use them to teach about price. My focus at that time was on how prices bring us information for choosing. How prices identify what is important to us by applying opportunity cost ("what do I have to give up?") to our lives in a clear way, particularly when the price of something is rising.

In lunchtime discussion today, I was reminded of the tendency among many people to transfer the choice (read cost) to someone else. The recent calls for investigations as to why some groups are benefiting at our "collective expense" reminded me that many of us don’t like making hard choices. My observation of this being a "holdover from childhood" was actually brought home to me as I listened to numerous talk and news shows over the weekend. The constant cacophony seeking to blame someone else was both amusing and pitiful. Amusing because everyone was to blame except the person speaking…pitiful because no one seemed to understand the simple economic truth…markets work. It was, at times, like listening to the very young.

Those of us who seek "energy independence" could see that happen sooner if we let gasoline prices rise. Those of us who seek "energy conservation and responsibility" would see the same dream come true. Those who wish for a more fuel-efficient method of travel would likely see the same thing.

Higher gasoline prices could ultimately force us to make better use of our own resources, oil or otherwise. Those same prices encourage us to be more careful about how we drive, how often we drive, and when and where we drive. And higher gasoline prices are already altering the shape of vehicle sales in the U.S. with demand for smaller, more fuel-efficient cars strengthening, and resale price of larger used gas-guzzlers falling.

Our efforts to mitigate these costs, while attractive to us as individuals in the short-run, just postpone the ultimate cost that we need to address in the longer term. I am reminded of a quote by Charles Woodruff Yost, one time writer for the Christian Science Monitor, in his book The Age of Triumph and Frustrations, "Any system that doesn't take the long run into account will burn itself out in the short run."

The ultimate point of this post is that those students that wish to see us conserve energy, energy independent, or whatever, may need to ask themselves whether or not higher gasoline prices may actually give them what they want sooner. The market imposes choice. Those choices are reflected in our search for substitutes (for oil and for current transportation technology), and the income effect (increases costs of one good or service will reduce the funds available for other goods and services).

Here's another interesting entry on TCS Daily in a similar vein.

Your responses and thoughts are welcome.

Posted by TSchilling at 8:16 PM | Comments (0)

Thursday, April 13, 2006

Money vs. Barter

An interesting experiment in extended barter is going on at One Red Paper Clip.

WARNING: You might want to read through the list of trades to make sure you/your students/their parents don't get offended by this. One offer is for a lap dance.

Questions for your students: Is money more efficient than barter? Does the current technology change your view or assumption? What functions of money/ characteristics of money are being demonstrated by the "inability" to make instant transactions?

A hat tip to Tyler Cowen at Marginal Revolution .

Let us know if you get any discussion out of your students with this, and where the discussion leads.

Posted by TSchilling at 8:12 PM Comments (0)

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 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