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 the appropriate economic theory and principles, and a homework section that ties what they found in the experiment to the theory.

Part I: Competitive Markets

Experiment 1: Supply and Demand

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 elaborate experiments.
Experiment 2: Shifting Supply and Demand

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 curve.

Part II: Market Intervention and 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 provides powerful insights into the problems that arise from the government's "War on Drugs."
Experiment 5: Minimum Wages

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: Externalities

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 equal 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 marketable pollution permits, which are present in fixed supply, and one for pollution-producing goods.
Experiment 7: Monopolies and Cartels

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 entrants. These results lead to a natural discussion about long- versus short-run equilibria.
Experiment 9: Measuring Productivity

A vivid illustration of a real production function (paper airplane folding). Students seem to enjoy this, even though trees often object.
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 Bargaining

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 Selection

This experiment is based on George Akerlof's "Lemons" model. 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 environment.

John H. Miller, miller@zia.hss.cmu .edu.