Using Experiments with Economic Principles: Microeconomics, 2nd Edition to Supplement Intermediate Courses

The book works well as a supplement to an intermediate course in economic theory. Below are some suggested chapters. (See the annotated table of contents for additional descriptions of the experiments.)

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

  The experiment and lab report can easily be skipped for an intermediate class, although assigning the discussion section and corresponding parts of the appendix may be a good idea.

Part II: Market Intervention and Public Policy

These three experiments are easy to do and fun for the students. You may want to pick one to accompany the appropriate material.
• Experiment 3: Sales Taxes

  Finally, 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 of the equivalence of a tax collected from demanders 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. Fundamentally, it is a nice application of some basic competitive equilibrium theory.

• Experiment 5: Minimum Wages

  In addition to learning about the effects of market controls like price ceilings and floors, students learn to define and measure voluntary and involuntary unemployment.

Part III: Imperfect Markets

• Experiment 6: Externalities

  This experiment has been very successful in intermediate classes. The effect of externalities is brought home in a dramatic (and frustratingly real) way to most students. One session applies a Pigovian tax whose revenue is returned in equal shares to all participants. 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 pollution-producing goods.

• Experiment 7: Monopolies and Cartels

  Students learn about monopoly pricing, price discrimination, and how cartels can break down. Students particularly enjoy watching the cartels break apart, and this can lead to lively discussions of free riding behavior.

Part IV: Firms and Technology

• Experiment 8: Entry and Exit

  This experiment has a two-stage game in which there is 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.

• Experiment 9: Network Externalities

  This is a wonderful experiment to show the power of e-conomics to your intermediate students. This experiment discusses network externalities and some nice theory as well. The material is well suited for intermediate students, and will show them how economics can be applied to the information age.

• Experiment 10: Measuring Productivity

  More suitable for principles courses.

• Experiment 11: Comparative Advantage

  Probably more suitable for principles courses.

Part IV: Information, Auctions, and Bargaining

• Experiment 12: Adverse Selection

  This experiment is based on George Akerlof's "Lemons" model. It works very well to bring the ideas of asymmetric information, separating equilibrium, pooling equilibrium, and self-confirming beliefs to life for intermediate economics students.

• Experiment 13: Auctions

  Auction theory is a lovely intermediate topic. The experiment will get you started in the right direction.

• Experiment 14: Bargaining

  A good way to begin discussions of game theory. You can do bargaining, and then add other interesting games (for example, centipede games, etc.).

Appendix: Further Economic Principles

All of this material is well suited to intermediate students.