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)

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)

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


Comments
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

What to Teach

I was reading an interesting blog the other day. The author of "The Big Picture" is teaching Econ 101 and was looking for ideas. The article and the comments for the post are very interesting, and got me thinking.

Given the insight to what people think should be in Econ 101 at the college level, what do you think should be covered at the high school level? What is your approach?

1. "Cover as much as possible because much of this is important and my students might not go to college."
2. "Cover as much of the 101 course content to help my students have a better understanding."
3. "Cover only practical applications and personal economics because the 101 course seems to miss that."
4. "Something else entirely."

I understand that many of you are in states where the curriculum is governed by benchmarks and testing. But given the insights, what would you do?

Posted by TSchilling at 4:42 PM | Comments (0)

Nations Don't Trade

I've been on the road a lot lately. That means I haven't had the ability to post easily, and I have a lot of e-mail and blog-reading to get caught up on. It also means I end up with time to think. It doesn't necessarily mean I've thought things all the way through, just that I've thought about them.

During this road trip, I had occasion to hear students speak about the state of the economy. I've been amazed at the frequency with which trade issues have come up. Generally students don't speak about international trade. The frequency with which it has been mentioned made this all the more interesting.

What caught my attention is the belief among many students that the "government" or "big business" needs to do something to change the flow of trade. What has been totally absent is an understanding that the flow of trade will change only when individuals change their trading habits. Ultimately, it is individuals who trade, not nations or firms. Nations and firms are, as many economists will point out, convenient amalgamations, generalized combinations of individuals. And when these groups trade, it is the result of an individual's choice. And that individual usually makes the decision based on a belief that the goods or services bargained for will be resold to yet other individuals.

Trade balances are the net of all the purchasing information made by individuals (for themselves, their firms or their agencies) in the global marketplace. When your students choose to buy something, they influence that total. And they are the lynchpin for any continuity or change in the flow. For whatever they choose to do will impact on their real income, the basket of goods and services that they consume. That is the true measure of their wealth.

The classic classroom activity for this is the "inventory." Students can go home and inventory their room, their closet, or whatever. They can list the items, the nations of origin, and with a little research, the price of those items. They can then try to find substitute goods/services, the sources of those items, and the prices. They should then see if they can construct a totally domestic basket of goods/services, and whether or not they can get the same items, for the same price.

If the global market is working, chances are they will find that a totally domestic basket of goods will cost more than the international basket of goods. The choice is now theirs. Are they willing to pay more for certain products, and reduce the total goods in their basket, or not? They trade because, ultimately, they consume. It’s their money. It’s their basket of goods. It’s their choice.

As always, I welcome your comments.

Posted by TSchilling at 8:49 PM | Comments (0)

Land, Labor, Capital and ....?

There seems to be a resurging discussion about whether or not entrepreneurship should be included as a "Factor of Production." Mark Thoma discusses the issue at The Economist's View. It is an interesting post. In it he excerpts from an article in The Economist which reviews a paper by William Baumol, who advocates studying the role of the entrepreneur in the productive process.

I must admit that I was originally taught only the "big three". At the time, my instructors saw entrepreneurship as one more part of labor, similar to management. Yet that always left "profit" as a return that was, in my mind unassigned. (Rent was return on land, interest was return on capital, wage was return on labor, profit was...?)

In my mind, the case for entrepreneurship being a factor hinged on the extent to which you viewed the "entrepreneur" as an innovator. What did they do that was new or different? Ostensibly, they combined land, labor and capital in innovative ways. But what if they "merely" brought an existing concept to a new place? This then led to thinking about whether innovation took place in great leaps or was incremental (or both.) As is pointed out in the article The Economist, Baumol's work hearkens back to the work of Joseph Schumpeter.

I eventually came around to view entrepreneurship as one of the factors, and was interested to see it fall off in importance in recent years. It is heartening to see the study of entrepreneurship reviving. How do you address the factors of production? Is it only those of us of a certain age who can remember "three factors." Or is there a younger group that was taught the same way, discounting entrepreneurship.

Your comments are welcome.

Posted by TSchilling at March 10, 2006 3:28 PM


Comments
Entrepreneurship is small, profits typically being only 10% of the economy, but they are really the most important, as they drive the economy forward. Without it, stagnation sets in quickly.

Posted by: Lord at March 10, 2006 8:33 PM

Everyone Else is Asking

so I might as well go along with it. Will you buy Alan Greenspan's memoirs? I probably will, but I also suspect I'm different from many economic educators in that I find more value in biographies/memoirs than many of my colleagues. I find the historical context important to my understanding, and I find the application of economics (when well explained) enlightening. The personal view just "personalizes" the whole experience.

I really have two questions, I guess.
1. Will you buy (and read) Mr. Greenspan's book?
2. Do you generally buy (and read) biographies or memoirs of economists?

Posted by TSchilling at March 8, 2006 4:21 PM


Comments
Hi Tim!
1. No, but I might check it out at the library.
2. Not usually.

And I have a question for you. What affect do you think the Kalamazoo Promise program will have on the quality of the Kalamazoo school system?

"Civics Lesson: Kalamazoo, Mich., Pegs Revitalization On a Tuition Plan --- Promise of College Funding Stokes Housing Demand, But Will Jobs Come, Too?"
By Neal E. Boudette
03/10/2006
The Wall Street Journal

I have been meaning to comment for a while!

Posted by: Amanda Gibson at March 10, 2006 9:37 PM