Annotated Table of Contents
The book is organized as a series of
experiments. Within each
experiment, there is a short description to be
read by the students
prior to class, a lab report in which to collect
data and begin some
analysis, a discussion section that elucidates
economic theory and principles, and a homework
section that ties what
they found in the experiment to the theory.
Part I: Competitive Markets
This section of the book teaches the fundamentals
of supply and demand in a single market.
- Experiment 1: Supply and
- This is a good way to
begin the class and get the students thinking
about how markets work.
It teaches students to draw and understand
step-function demand and
supply curves, and it gives them useful practice
for later, more
- Experiment 2: Shifting Supply and
- This experiment illustrates the method of
comparative statics with a shifting supply curve
in a hypothetical fishing village. The
experiment also forces students to grapple with
the concept of sunk costs. The discussion section
presents real-world examples of shifts in
supply and/or demand. This discussion is intended
to teach them to determine in applications which
curve shifted, and to distinguish shifts in a
demand or supply curve from movements along the
Part II: Market Intervention and Public
Each of the experiments in this section
demonstrates applications of the basic theory of
supply and demand to issues in public policy.
- Experiment 3: Sales Taxes
- At last, they will figure out those shifts!
Students get to
explore the implications of putting a tax on the
buyers versus the
sellers. Skeptics are finally convinced that a
tax collected from demanders is equivalent to a
tax collected from suppliers. Students
also learn first-hand the meaning of "excess
burden" of taxation.
- Experiment 4: Prohibition
- Students seem to really enjoy this
experiment, perhaps because of the
topic. They are often very much surprised that
the simple economic theory they have learned
insights into the problems that arise from
the government's "War on Drugs."
- Experiment 5: Minimum
- The experiment imposes a minimum wage in a
labor market. This experiment introduces a simple
"theory of labor demand" in which
profit-maximizing employers have diminishing
marginal product of labor. From the experiment,
students also learn to define and measure
voluntary and involuntary unemployment. The
discussion and homework offer a general analysis
of price floors and ceilings.
Part III: Imperfect Markets
These experiments present environments in which
market outcomes are not expected to be efficient.
The ideas here are useful both for understanding
the workings of actual markets and for suggesting
appropriate roles for government policy.
- Experiment 6:
The effect of externalities
is brought home in a dramatic (and frustratingly
real) way to most students.
A Pigovian tax, whose revenue is returned in
shares to all participants, is used to correct
for the externality.
The fact that a tax increases rather than
decreases total profits is a nice complement to
the lesson on the
excess burden of a sales tax when there is no
externality. The final
session has two simultaneous markets, one for
pollution permits, which
are present in fixed supply, and one for
- Experiment 7: Monopolies and
- Students learn about monopoly pricing, price
discrimination, and the formation and breakdown
of cartels. Students particularly enjoy watching
the cartels break apart, and this can lead to
lively discussions of collusion and cooperation.
Part IV: Firms and Technology
We have found that a good way to introduce
students to the basic ideas of the theory of the
firm is to gradually slip economists' notions of
technology and costs into the design of the
experiments, and let students who play the role of
firms figure out how to behave before they are
exposed to abstract theories. Some of this has
already been done in the earlier experiments on
shifting supply curves, sales taxes, minimum
wages, and externalities. We pursue the theory
of the firm further in these experiments.
- Experiment 8: Entry and Exit
- This experiment has two-stages:
an "entry stage" and "market stage." In the
entry stage, firms
sequentially and publicly announce their
intentions to enter or not
enter a local restaurant industry. Firms who
enter must pay a fixed
cost regardless of the number of meals they sell.
Each has constant
marginal cost and a fixed capacity. In the
market stage, firms sell
meals to consumers. If the number of entrants is
"too small" there will be profits, attracting more
entrants in the next
round. If the number of entrants is "too large"
there are losses, and
in later rounds there are likely to be fewer
These results lead to a natural discussion about long- versus
- Experiment 9: Measuring
A vivid illustration of a real production
function (paper airplane folding).
Students seem to enjoy this, even though trees
- Experiment 10: Comparative Advantage
A simple illustration of comparative advantage,
the gains from international trade, and even
general equilibrium. After doing this lab,
students find the notion of comparative
advantage easy to grasp.
Part IV: Information, Auctions, and
These topics often get little or no attention in
standard principles texts. Nevertheless, they are
each closely related to students' practical
experience in actual markets, and each of these
topics has been a success story for the methods
of modern economics. These experiments have been
very popular with our students, who have had
little difficulty in grasping these ideas.
- Experiment 11: Adverse
- This experiment is based on George Akerlof's
Ideas about adverse selection and moral hazard
are developed, along
with more advance topics like separating
equilibrium, pooling equilibrium, and
self-confirming beliefs. While these may be difficult
topics to teach abstractly, the experiments allow easy access
to these ideas.
- Experiment 12: Auctions
- The auction experiment has been popular with
our students, who seem to be very curious about
how auctions actually work, and very pleased to
discover that a bit of simple theorizing
contributes much to their understanding.
- Experiment 13: Bargaining
- We offer a series of sequential-bargaining
experiments, motivated by a hypothetical sale of
a bicycle. This experiment allows students to
learn a bit of bargaining theory and simple game
theory. The discussion briefly introduces
students to some of the results in the large body
of experimental research on this bargaining
Copyright (c) 1996, Theodore Bergstrom and John H. Miller, All Rights Reserved