Flashcards – all units | The Economics Classroom

I’ve been hard at work the last two weeks creating new tools for the Introductory Economics students preparing for their AP, IB, or other exams this month. My latest addition to my website, Econclassroom.com, is Flashcards for all the key terms in the AP and IB Econ syllabuses. The flashcards also work very well on mobile devices (Android, iPhone, iPad), and can be easily accessed from my new Mobile App, available for various devices here: EconClassroom.com – the Mobile App.

You can study flashcards from the entire syllabus or from one unit at a time. You’re presented with ten flashcards at a time, which you should try and master before clicking the “shuffle” button to get ten new flashcards from the unit you’re studying. The cards always appear in random order. If you wish to review key terms in alphabetical order, you are best served by another recent addition to Econclassroom.com, the dictionary.

If there are any key terms or concepts you think could be added to the dictionary or the flashcards, please log in and leave a comment on the page for the unit you think a term should be added to, I will respond to all comments quickly with the addition of the terms requested!

Enjoy! And good luck on this months exams!

Related posts:

1. Resources for AP Economics and IB Economics Exam Review
2. AP Economics and IB Economics Review Materials Online NOW!
3. AP and IB Economics study guides v3.0 ready for download!

Visit my new site, The Economics Classroom, for review videos, an Economics glossary, worksheets and practice activities and countless other resources to help you prepare for your exams in Introductory, AP or IB Economics. Or go straight to the Economics Exam Review page.

Related posts:

1. AP Economics and IB Economics Review Materials Online NOW!
2. Final study guide posted to “Exam Prep” page – time to get down to business!
3. Economic flashcards now ready to review on Econclassroom.com!

In my original “Golden Balls” blog post (see below), written almost three years ago after I saw a clip of the finale in an episode of the British game show, Golden Balls, I analyzed the actions of Sarah and Steve, who  had to decide whether they would split or steal a jackpot of 100,000 British pounds. The contestants had one minute to try to convince one another that they would split the money; but when it came down to it Sarah stole and Steve split, meaning Sarah got to keep the whole jackpot and Steve went home with nothing.

In that original post, I proposed that Steve’s best chances for going home with any money would have been “for him to use the one minute of discussion time to convince Sarah that he would choose SPLIT, yet be willing to go home with something LESS THAN $50,000 and accept that Sarah was going to choose STEAL. He could have threatened to chose steal if she did not agree to share her winnings with him to some extent.”

In a recent episode of the same game show, a contestant followed a similar strategy to that I suggested Steve should have taken. Watch the clip below, from a February 2012 episode of Golden Balls.

In this episode, Nick immediately takes control of the negotiations by insisting that he is going to steal, which is a very unorthodox approach to this game, in which the traditional strategy is to try and convince your opponent that you are going to split. By establishing a credible threat to steal, Nick puts all the pressure on Ibraham to decide only one of two things:

1. Does Ibraham trust that Nick will split the money with him after he has stolen the full jackpot, and
2. Would Ibraham rather both of them go home without any money at all than Nick win the jackpot and possibly not split it with him later on?

Rarely does such a perfect illustration of the Prisoner’s Dilemma come along for Econ teachers to use in their classroom:

The payoffs are clear:

Each player has a weakly dominant strategy, which is to choose to steal. By choosing to steal, the player has a chance at maximizing his own payoff, but will do no worse than he would if his opponent also chooses to steal and at least will have the satisfaction of thwarting his opponent’s attempt to steal the money.

There are three Nash equilibria in the game, which are outcomes at which a player can not do better on his or her own by changing his or her strategy. The outcome Steve was hoping for by chosing “split” (50/50) was not a Nash equilibrium because Sarah knows she can do better if she chooses steal when Steve chooses split. Steve doomed himself by choosing split because he should know that Sarah’s dominant strategy is to choose steal. However, Sarah would also have doomed herself by choosing split because she should assume that Steve would also chose steal since steal is a dominant strategy for him too.

John Nash, who pioneered the field of Game Theory, assumed that humans were coldly rational, self-interested, deceptive creatures that would not hesitate to stab one another in the back to get what was best for themselves. His theory of human behavior is only partially proven correct in this game, in which Steve is shown to be the sucker and Sarah the coldly rational self-interested player. The best chance for Steve to go home with any money would have been for him to use the one minute of discussion time to convince Sarah that he would choose SPLIT, yet be willing to go home with something LESS THAN $50,000 and accept that Sarah was going to choose STEAL. He could have threatened to chose steal if she did not agree to share her winnings with him to some extent. Then again, any promise Sarah makes she could later break, thus further empowering the players to choose steal.

Discussion questions:

1. What in the world is going on here? Why did Sarah choose steal rather than collaborate with Steve and share the $100,000?
2. Was Steve totally wrong to choose split? What would you have done in his situation?
3. How do the choices faced by Steve and Sarah relate to the choices faced by firms in oligopolitic markets? Now that you’ve seen this video, can you explain why collusive agreements between oligopolists often fall apart? Why do cartels such as OPEC often fail to achieve the high price targets agreed upon in meetings of their leaders?

Related posts:

1. The “delicate balance of terror”: How game theory can be used to predict firm behavior (oh, and save the human race from utter annihilation)
2. Understanding Oligopoly Behavior – a Game Theory overview
3. Irrational behavior leads to larger rewards

Since September 2011 I have been producing and publishing around three video lessons per week covering the topics I’m teaching in my three Economics classes at any given time. With an AP Macro class, a year 1 and year 2 class going on all at the same time, this means I’ve been making videos covering everything from linear supply functions to protectionist quotas to monetary policy.

This week I posted my 50th video lesson. Since I began producing lessons on my YouTube channel, they’ve been viewed over 35,000 times and nearly 200 people have subscribed to my YouTube feed.

If you haven’t checked out my new website, The Economics Classroom, consider subscribing to the weekly newsletter from that site. You’ll receive one email a week with links to the latest videos covering Micro, Macro and International concepts. In addition, I’ve been creating and posting free worksheets, practice activities and even unit quizzes and tests to the resource page.

If you’re wondering what my videos are like, check out the one I posted tonight to introduce the new IB Year 1 unit on Theory of the Firm, which I’ll start teaching on Tuesday this week!

Related posts:

1. A new website for Video Lectures – the Economics Classroom
2. Another year of econobloggin and wikinomics comes to an end!
3. Welker’s Wikinomics turns FOUR!

If you’re a regular visitor to this blog, you’ll notice that over the last month or so, I have begun posting many video lectures to YouTube and including them in lessons and activities on this blog. My adventures in the “flipped classroom” model of instruction has proven extremely successful, as I have heard much positive feedback from students who have found the videos useful reinforcement for our regular class activities and a helpful tool for revision.

As this project has developed, however, I have begun to notice that this blog has turned into more of a video hosting site and less of what it has always been, which is a written journal of economic analysis targeted at the high school economic student. While I have begun making video lectures, I do not want to neglect the traditional form of blogging that has guided my activities on this site for almost five years.

Therefore, I have decided to add a new site to the selection of resources already available through Welker’s Wikinomics. As of tonight, I have created The Economics Classroom, a website built exclusively for my video lectures. From now on, all video lectures uploaded to YouTube will be published on the new site, at www.econclassroom.com.

Videos will be organized in categories based on the five units of the IB Economics syllabus: Intro, Micro, Macro, International and Development Economics. Much like blog posts on this blog, videos posted to the Economics Classroom will include discussion questions or in-class activities for students to complete on their own or during class with their peers and their teacher’s help.

Please visit the Economics Classroom and enjoy the videos that are there. Currently, only about 17 video lectures have been posted, but I am recording on average three per week, and by the end of this year I anticipate there will be around 100 lectures available on the site. Over the next two years, I will record over 150 lectures covering every topic from the IB and AP Economics syllabuses.

Leave your feedback on the posts. Join the discussions that are already going on on some of the posts. Tell your friends, your teachers, and your students about the site! The more people who use it, the better it will become!

Thanks for everything!

Jason

Related posts:

1. AP and IB Economics study guides v3.0 ready for download!
2. SAS Economists Podcast #6: The oligopolistic nature of the video game console market
3. Welker’s Wikinomics celebrates its 1st birthday with exciting new features for Economics teaches and students

The activity below is to introduce Economics students to the three primary Macroeconomic objectives of any government or policy making body. These are :

Full employment of the nations work force: This means that nearly everyone who wants to work in the country is able to find a job. It does not mean that there is no unemployment, rather that the unemployment that does prevail in the economy is voluntary, i.e. it exists because workers are simply not willing to work at the prevailing wage rate. If there is involuntary unemployment in the economy, then the country is not meeting its macroeconomic objective, and there is likely a recession caused by a lack of overall demand (aggregate demand) for the nation’s goods and services.

Resources for learning about Full Employment:

• Textbook (Welker’s IB Economics for the IB Diploma) pages 286 – 288, 295-299.
• Reffonomics – Measuring Unemployment
• Reffonomics – the Types of Unemployment
  
• Reffonomics – Unemployment and Employment Quiz

Price level stability: Changes in the average price level of goods and services in the nation are measured by calculating inflation, commonly using a consumer price index to do so. Low and stable inflation is one of the macroeconomic objectives since price level volatility (high inflation or deflation) has several harmful effects on a nation’s households and business firms. Keeping inflation low and stable promotes a healthy environment for achieving business investment, full employment and economic growth

Resources for learning about Price level stability:

• Textbook pages 302-303, 306-307, 311-314
• Reffonomics – Calculating Inflation using a CPI
• Reffonomics – The effects of inflation
• Reffonomics – Inflation Quiz

Economic growth: The third macroeconomic objective is to increase the output of the nation’s goods and services year after year. Economic growth refers to the increase in real Gross Domestic Product (GDP) and can be measured by finding the total value of a nation’s output one year, comparing it to the previous year, and adjusting it for any changes in the price level between the years. Economic growth is a desirable goal because it generally means that incomes are rising and people’s lives are getting better. Of course, GDP only measures the physical output of goods and services, and does not include many non-economic variables that also should be considered when measuring people’s well-being. But rising incomes and output are deemed worthy goals since they are associated with rising living standards.

• Textbook pages 244, 251-253, 337-340
• Reffonomics – Real GDP lesson
• Reffonomics – Real GDP Multiple Choice Quiz

Assignment: Complete the readings and online activities above. Then use the data in the table linked below to answer the quesitons that follow.

Questions:

1. Calculate the unemployment rates for each of the years in the table. Describe what happened to unemployment over the years displayed.
2. Calculate the inflation rates between each of the years in the table. Describe what happened to inflation over the years displayed.
3. Calculate the Real GDP for each of the years in the table.
4. Calculate the Real GDP growth rates between each of the years in the table. Describe what happened to real GDP from one year to the next in the years displayed.
5. Describe the relationship between the inflation and unemployment rates you calculated for each of the years. Is there any correlation in how the figures change from year to year?
6. Based on your analysis of the data above, to what extent has the United States succeeded in achieving its three macroeconomic objectives of:

• Full employment?
• Price level stability?
• Economic growth?

Related posts:

1. Lesson Plan: Macroeconomic Indicators around the World
2. Politics, priorities, and the Phillips Curve
3. A must read for AP Macro teachers: Paul Krugman explains why deficit spending during a recession does NOT cause crowding-out

It’s been a long road to this day, September 8, on which what I truly believe is the best IB – specific Economics textbook ships from Pearson’s warehouses in the UK. Pearson Baccalaureate’s Economics ships today, so if you haven’t already, order yourself an evaluation copy from the Pearson website. If you like what you see, consider ordering a set for your classes!

Related posts:

1. AP and IB Economics study guides v3.0 ready for download!
2. 2008 Macroeconomics Free Response Questions – first impressions…
3. AP and IB Economics: another semester begins

The following lesson is a great way to start an IB or AP Economics class for the year. I just tried it this morning for the first time and it went great!

Instructions:

• Before your Econ students arrive for their first full class meeting, remove chairs until there are only half as many as you will have students. I stuck mine in the library, well out of view of the students coming to my class.
• Tell students that the custodian removed the chairs for repairs, or they were taken to another room for a presentation or something. Anyway, you don’t know when they’ll come back and it may be a couple of weeks.
• For now, we are stuck with this many chairs, and we have to figure out a way to resolve this problem!
• Tell the students it’s up to them to decide how our limited number of chairs will be allocated. Have them brainstorm solutions out loud while you write their suggestions on the board.
• Try to come up with 6-10 possible solutions, then have the students vote on the one they would like to see enacted. They can only vote once! Write the tallies next to each option on the board.
• If there is a tie for #1, have the whole class vote between the two or three options you’ve narrowed it down to until there is one clear winner.

Scarcity exists:

• When something is limited in supply and in demand, it is scarce.
• Everyone wants to sit, but the chairs were missing… chairs were scarce.
• Scarcity is a function of both demand and supply. The greater the demand relative to supply, the more scarce something is.

Choices must be made:

• Because scarcity exists, we must make choices about how to allocate our scarce resources
• We had to choose between competing systems for allocating the chairs

Rationing systems:

• When faced with scarcity, a system must be decided upon to ration the scarce items.
• The systems we decided upon ranged from a lottery to first come first serve to a merit-based system.

Something that is scarce has value:

• Everyone wanted a chair, yet they were limited. Because the chairs provide us with benefit, we value them, and are therefore willing to pay to have one.
• Value is a function of scarcity. The scarcer something is, the more valuable it becomes (gold), while less scarce items are less valuable (drinking water).

Consumer surplus:

• Consumer surplus is the difference between what you are willing to pay and what the price is.
• Sofia would have had lots of consumer surplus if she only had to pay $2 , because she was willing to pay up to $10.

Equity versus Efficiency:

• Equity means fairness, while efficiency requires that resources go towards their most socially optimal use, so that those who value something most end up getting that which they value. 
• The tradeoff between equity and efficiency is a major theme of the IB Economics course.
• What is most efficient (an auction to determine who is willing to pay the most for the chairs) may not be equitable (or fair).
• When the richest students end up in the chairs, those with lesser ability to pay feel that they’ve been treated unfairly.
• A lottery in which names would be drawn from a hat to determine who gets a chair is certainly more equitable, but is actually less efficient, since those who get the chairs may not be those who place the greatest value on having a chair.
• Auctioning the chairs assures that those who value them the most will end up getting them, therefore resources are allocated most efficiently.

Related posts:

1. Lesson Plan: Costs of Production Presentation for Y1 IB Economics
2. Lesson Plan – the Circular Flow simulation
3. AP Economics and IB Economics Review Materials Online NOW!

It has been quite some time since I have posted regularly to this blog, but that has been for good a reason. Over the last 15 months I have been working hard on two major projects, one IB Economics textbook and one AP Macroeconomics textbook. Both books will be published at the end of the summer and ready for students and teachers to use during the new school year.

With these exciting and exhausting projects now coming to an end, I have begun to turn my attention once again to this blog and the other online resources that presented me with the amazing opportunities to write two textbooks in the last year. You will notice right away that this blog, and my home page, have a new look to them. This is my attempt to improve this site’s “brand” and bring the design into the new decade!

In addition to re-designing the blog and the homepage, I have also begun to re-design the very popular Lecture Note / Study Guide sets that so many students and teachers have ordered over the last couple of years. The IB Economists out there will know that starting this fall, the IB will launch its new curriculum for the incoming 11th graders, who will sit for the new IB Economics exam for the first time in May of 2013. The text I am just finishing up, Pearson Baccalaureate’s Economics for the IB Diploma, is written specifically based on the new IB syllabus. With its launch, of course, my old lecture notes and study guides will be out of date, so my next project is to bring those popular resources up to speed with the new IB curriculum. The new bundle will include 24 separate PowerPoint Lecture Notes (also available in pdf format for students). I expect these resources to be ready by September or early October, so please stay tuned. Below is a preview of the new slide designs, from Unit 1.1 “Introduction to Economics”.

In addition to a new website design, updated PowerPoint Lecture Note / Study Guides, and two textbooks coming out, I have also recently created a new Facebook profile specifically for readers of Welker’s Wikinomics. If you’re like me, you probably get most of the important information in your life off of either Facebook or Twitter these days, and you can’t be bothered to go to some dude’s blog every day to see what he’s writing about. Now you follow Economics in Plain English through either Facebook, Twitter, or RSS. In addition to the weekly posts on the blog, I will also post many other articles and links to the Facebook page as I stumble upon them in my own online activity. Please friend Welker’s Wikinomics on Facebook, and if you’re not already, consider following me on Twitter too (jasonwelker).

In the mean time, enjoy your summer! I am looking forward to meeting my own group of new IB and AP Econ students in the fall, and also anyone else who happens upon the blog during the upcoming semester!

Related posts:

1. Our Wiki – SAS Econ students help Mozambiquean Econ students learn!
2. Welcome to my 2008-2009 Economics students
3. Resources for AP Economics and IB Economics Exam Review

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All IB schools who are part of the the May examination session are now in the last week of class, before the study sessions and final examination period begins. Exam strategy is now perhaps even more important than actual study and can lift your marks. These comments refer to SL – Paper 2 and HL Paper 3 commonly known as the Data Response papers. These hints are obviously of my own opinion and reflections and not those of the IB Organization.

Here is my top 10 hints…

Before the exam…

1. Revision. As for all of the other papers, make sure you have been through the syllabus and have throughly checked and know that you understand each part of the curriculum. I encourage my students to create bit size revision notes on the essentials of each subtopic throughtout the duration of the course.
2. Definitions. Consider what key words are required to explain the definition. Try rote learn the 10 most important definitions for each big topic, and ask you teacher to for a list of what concepts might be covered in each section of the course. Make sure you consult a good textbook for clarification on definitions.
3. Practise reading articles: Ask your teacher for some practice data response questions. Practise reading the questions and then searching the article for some supporting data to help explain your answer. The articles have been chosen because they highlight certain events. You need to find the piece of data or a quote that could pick.

During the exam…

1. Manage your time: In the data response examination you have to complete three questions, each worth 20 marks. Therefore you have 60 marks in total over 120 minutes. Therefore try not spend more than 2 mins per mark. So for the evaluation question d, try to allow about 16 minutes, but not too much more. Remember this exam requires lots of reading time, so factor this in to your time management.
2. Pick the questions early: You need to obviously choose 3 of the 5 options to answer. I encourage my students to read the part d question of each paper first, and then gauge if you can answer the question. If you are less confident in the question d questions available then perhaps choose a different question. These questions are worth 8/20 and therefore carry a slightly higher importance.
3. Read each question carefully: Within the question there are always trigger words. If the question is about currency then you probably need to analyse the foreign exchange market. If the question mentions recession then consider drawing a NeoClassical diagram with a recessionary gap. The command word will usually be explain which means examine and describe the component parts of the concept.
   
4. Labeling Graphs: Graphs are a crucical part of questions b and c. You need clearly label graphs to ensure that they relate specifically to the material in the extract. Remember each graph has a particular set of labels. Try revise the difference between, exchange rate graphs, AD/AS graphs, Labour Market diagrams or a Lorenz Curve.
5. Explaining Graphs: Question B and C are always worth four marks and follow an standard format. Two of these four marks will be attributed to the graph and two to the explanation. Therefore check that you have explained the graph by identifying the related causes that have lead to the change. For instance… the demand for exports has fallen, leading to a fall of the demand of the currency, leading to a shift of the Demand for Euro to the left, which ceteris paribus, will lead to an appreciation of the Euro against the Yen as illustrated on the graph. The explanation does not need to be long but precise and use appropriate terminology.
6. Evaluation: Question D will always ask you to evaluate a statement or policy that is mentioned in the extract. The question will be graded according to criteria levels. To attain Level 1 you need to have recognized the concepts in the question and perhaps attempted a definition, or discussed the idea. To attain Level 2 you need to explained these concepts in some depth and have tried to apply the concept to material presented in the extract. Evaluate means that you have to go further than purely explaining the concept this is required for a Level 3 response. For instance if the question is about “evaluating the introduction of tariffs into Malaysia” you will need to explain the effects of the decision on stakeholders such as consumers and domestic producers, perhaps consider the long run and short run impacts and consider the advantages or disadvantages. Finally to attain the highest grade to need to make some judgement on what the main point of arguement is. All of these aspects are considered effective evaluation. Given the time constraints of the exam you will be rewarded for using one or more of these approaches, but I think the final judgement and using material from the extract is most important. Without references to the data you wont attain higher than Level 2.
7. Proofread: If time permits try go back and double check your graphs for any obvious glaring errors and fix labels and arrows. Try to fix any common mistakes such as suggesting that the curve shifts to the right instead of the left.

If you have any further comments, questions or other hints please add them below

Criteria for Question D – Data Response 

Related posts:

1. 2008 Macroeconomics Free Response Questions – first impressions…
2. 2007 AP Free Response Questions- a few surprises!
3. AP and IB Exam Questions of the Week

New York Manhole Covers, Forged Barefoot in India – New York Times

In the revealing story above, the NYT reports on the manufacture of the New York’s thousands of manhole covers, which it turns out come primarily from a foundry in the Indian state of West Bengal. An NYT photographer discovered the Indian factory, and his photos prompted the report here:

Eight thousand miles from Manhattan, barefoot, shirtless, whip-thin men rippled with muscle were forging prosaic pieces of the urban jigsaw puzzle: manhole covers.

Seemingly impervious to the heat from the metal, the workers at one of West Bengal’s many foundries relied on strength and bare hands rather than machinery. Safety precautions were barely in evidence; just a few pairs of eye goggles were seen in use on a recent visit.

In AP Economics, we have begun learning about resource markets, where firms hire the productive resources needed to produce their output. Land, labor, and capital are all needed to produce any output; the combination of these resources a firm will use depends on several factors, including the productivity and the prices of the resources. When the price of labor is low, firms tend to use more labor and less capital. In developing countries, especially those with a large, unskilled workforce (like India), firms are likely to specialize in the production of labor-intensive products, such as the manholes found in American cities like New York.

The scene at the Indian foundry sounds like something from the Middle Ages:

The temperature outside the factory yard was more than 100 degrees on a September visit. Several feet from where the metal was being poured, the area felt like an oven, and the workers were slick with sweat.

Often, sparks flew from pots of the molten metal. In one instance they ignited a worker’s lungi, a skirtlike cloth wrap that is common men’s wear in India. He quickly, reflexively, doused the flames by rubbing the burning part of the cloth against the rest of it with his hand, then continued to cart the metal to a nearby mold.

Once the metal solidified and cooled, workers removed the manhole cover casting from the mold and then, in the last step in the production process, ground and polished the rough edges. Finally, the men stacked the covers and bolted them together for shipping.

Why are New York’s manhole covers being made over 8,000 miles away, anyway? Wouldn’t it make more sense for American cities to buy such items from firms making them right here in the United States? To understand this question, we need to consider the principle of comparative advantage, which says that a nation should specialize in the production of the products for which it has the lowest opportunity costs.

Manhole covers manufactured in India can be anywhere from 20 to 60 percent cheaper than those made in the United States, said Alfred Spada, the editor and publisher of Modern Casting magazine and the spokesman for the American Foundry Society. Workers at foundries in India are paid the equivalent of a few dollars a day, while foundry workers in the United States earn about $25 an hour.

Bengali laborers working in India’s foundries most likely face the trade off of an agrarian existence or maybe another factory job in the pre-industrial economy of the impoverished region, alternatives presenting a much low opportunity cost than American workers whose alternatives include jobs offering much higher productivity. The productivity of a worker depends on the quality and quantity of capital available, the level of training and education of the worker himself. Clearly, Indian workers have less access to capital, lower quality capital, and much less training and education than their American counterparts.

The result is that jobs that require large inputs of low-skilled labor, such as the manufacture of manhole covers, end up being “off-shored” to remote corners of South Asia. The added cost of shipping thousands of ton of iron around the world is more than made up for by the lower resource prices (thus costs of production) in the West Bengali foundries.

Discussion Questions:

1. Why do the Indian foundries use such large inputs of labor, and relatively little machinery?
2. What factors might reduce the demand for labor in the Indian foundries?
3. How does a firm know if it’s using the right combination of capital and labor in its production?

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Related posts:

1. Shanghai American School and the imperfectly competitive market for international teachers
2. UPDATE: Golden Balls, Game Theory, the Prisoner’s Dilemma, and the cold rationality of human behavior!
3. The “delicate balance of terror”: How game theory can be used to predict firm behavior (oh, and save the human race from utter annihilation)

The following post was written by an AP Economics student at Zurich International School

We all know about market failure on the product side: A good or service is under or over produced in the free market because of externalities that cause the marginal social benefit (MSB) to no longer equal the marginal social cost (MSC). Instead, the good or service is at another equilibrium where the MSB is equal to the marginal private cost (MPC). In such a case, the government may intervene by either taxing or subsidizing the good or service, or even by taking control of production in order to bring the values to the social equilibrium point (MSB=MSC).

Now let’s take a look at how this plays out in the human resources market.

In the human resource market firms tend to pay close to the same salary to people of the same rank or position. This can lead to market failure. An employer might have positive or negative externalities. Their location may be near public transport and in a beautiful location. Or it might be situated right next to a sewage treatment plant. When firms offer the same salary for the same position, their externalities may lead to labor surpluses or demand". Occurs when the price is below the equilibrium level, for example, when a government imposes a price ceiling in a market.');" onmouseout="tooltip.hide();">shortages, i.e. to market failure.

A firm with negative externalities will have a shortage of workers since the qualified workers can work elsewhere for the same amount. A firm with positive externalities will have a surplus of applicants. The number of people will want to work at such firm will exceed the positions available. The firm could profit from this situation by becoming more selective, accepting only those candidates of superior quality. However, there can also be additional costs to the company if its externalities attract a surplus of applicants. There would be additional costs for processing and reviewing the many applications received. In a world of perfect competition where employee qualifications would be the same, the firm with positive externalities would reduce the wages it offers. This would reduce labor costs and decrease the number of applicants, reducing thus administration costs too. A firm with the negative externalities would have to do the inverse: raise wages in order to increase the number of workers. In reality of course, employee qualifications differ and the firm with positive externalities may get a flood of applications from candidates even those with insufficient qualifications.

There are many examples of positive and negative externalities, not only location. These can range from a positive (or negative) brand to a positive (or negative) reputation in how the company treats employees, such as by having flexible hours or supplying recreational or sporting facilities. When a person is looking for a job, externalities can play a decisive role.

Case Study: John the Consultant

Let us look at John the Consultant as an example. Like most applicants, John is looking for a good salary but he also wants to enjoy his work environment.

John gets three job offers: One from a fairly standard consulting firm, one from a tobacco company, and another from a sports TV network (with great offices with fabulous views).

When he was originally applying, John thought he would jump at opportunity to work at the sports network. The network had been his favorite since he was a child. He loved the thought of working in sports and television.

But then he took a closer look at the actual offers. The sports network offered him a salary that did not even come close to his expectations. The consulting firm’s offer was like its offices: just the standard fare. On the other hand, the tobacco company’s financial offer was mind-blowing.

Why is this so?

The tobacco company’s labor market might look like this:

Here, due to ethical concerns with the product, too few people would be interested in working at the tobacco company if it paid the average wage. Its cost to hire an additional worker (let’s call it the Private Marginal Resource Cost (PMRC)), is higher than the market average (AMRC). This is why it is necessary for the firm to increase wages in order to increase the quantity of labor to the optimal level. To be noticed is that their new quantity of labor is still below the market average. If the firm wanted to raise labor up to the market average, it would have to further increase wages, which would be extremely inefficient since there will be a point at which the cost of the additional workers will outweigh the value they represent.

A sports network company might look like this:

The sports network company, if it offered average wages, would have a surplus of workers. Here the AMRC is higher than the PMRC. In such case, the economically wise action is to decrease wages, thereby decreasing the quantity of labor to the optimal amount. To be noticed again is that its optimal amount is still higher than the market average. If it further decreased wages to reach Q_A there would be a dead weight loss. (Pragmatically speaking, the firm would not hire a surplus of workers; it would stick to Q₂, but even then normal wages would be inefficient, since it could get the exact same quantity of labor at lower wages.)

Now John has the choice of taking less money along with the positive externalities, or more money when there are negative externalities. The externalities turn into opportunity costs. And this creates a dilemma.

Firms have long known the gist of this concept. Most large corporate firms have made serious efforts to increase employee satisfaction in the hope that it will become a positive externality. Yet since the vast majority of employers have done similarly, various types of extra benefits have become standard for the market. However there are still companies that stand out from the rest. For example Google has placed a high priority on creatively generating employee satisfaction and creating a work environment conducive to cooperation and innovation. It has excelled in these domains by so much that their employees are glad to take a lower paycheck than the market average for the privilege of working there.*

Now all this is a prime example of how externalities are corrected through the profit incentive. In contrast to the product market (where a company may not bear the full cost of a negative externality it causes, such as pollution, and government intervention can become necessary), no government interference is usually necessary in the human resource market. There it is the firm that notices and corrects the difference in employee wages in relation to externalities. Most companies have learned to put a price on externalities, and equilibrium is restored.

*As an example, according to the Financial Times Feb 7, 2011, Google now receives an astonishing 75,000 applications a week.

Related posts:

1. Reducing negative externalities – the European market for carbon emissions
2. An introduction to consumption externalities from a Singapore perceptive
3. Internalizing externalities: Zurich’s expensive garbage

That’s right, February 2007 marked the beginning of this great experiment in “learning the wiki way”. If all you’ve ever known is this blog, then you probably don’t know why it’s called “Wikinomics”. Before the blog was born, this project consisted only of a Wiki where my AP Economics students shared their understanding of the subjects we studied. Not long after the wiki got started, I created this blog, where in the last four years I, along with several guest authors, have written countless posts covering every topic from introductory Economics course imaginable!

Now on our fourth anniversary, I thought I’d take a moment to look back at where Welker’s Wikinomics has come from and then give you a brief idea of where it will go in the future.

First, as an Econ teacher, I love stats, so I thought I’d share some here.

The wiki, which eventually gave birth to this blog, has actually had more visits over the last four years than the blog has, and continues to turn up near the top in Google search results for countless economics terms.

Where Welker’s Wikinomics has come from:

Here’s the latest data on the wiki:

• Total visits since February, 2007: 545,468
• Average number of visits per day over the last four years: 944
• Number of subscribed users: 1092

And for the blog:

• Total visits since February, 2007: 388,207
• Most visitors on a single day ( March 1, 2011!): 1,013
• Number of posts: 550
• Number of reader comments: 6,275
• Number of categories: 193
• Number of registered users: 1,369
• Number of people subscribed to the weekly email newsletter: 298

All told, the eyes of nearly 1 million economics students, teachers, and others interested in the subject have have scanned the content posted on this blog and on the accompanying wiki!

What the future holds for Welker’s Wikinomics

For those of you who visit this site regularly, you will have noticed that over the last year, I have written far less frequently than I did in the past. I do have a good excuse for this, however, as I have been consumed with writing my soon to be released IB Economics textbook for Pearson. But as that project winds down, I plan to once again turn my attention to the resources offered by Welker’s Wikinomics. Some of the projects I plan to embark on in the next year include:

• A complete re-design of this blog
• Updating the “brand image” of all of Welker’s Wikinomics resources (wiki, universe, etc…)
• Re-designing and updating Welker’s Wikinomics Lecture Notes and Study Guides for use with the new IB Economic syllabus (to begin in August 2011)
• Designing and releasing in the iTunes Store a digital, iPhone ready study guide for AP and IB Economic students

This last goal is one I have had in the back of my mind for quite some time. It has gotten the thumbs up from my tech-equipped students here in Zurich, and once I have the time, it is something I seriously want to pursue. Don’t worry Android users, I myself have switched to the Google platform, and any app I develop for the iPhone will be made available for the Android as well!

Thanks to all you loyal readers and contributors who have kept coming back to the blog, wiki and other resources offered by Welker’s Wikinomics over the last four years! I will always remember how excited I was the day so long ago I got my 1,000th visitor on this blog! (I am pretty sure it took about three months to reach 1,000 visitors). Now, four years and almost one million visitors later, I am still as passionate as ever about creating and sharing great content for the high school economics student and teacher.

As always, if you like what you read here, and think you have something to contribute, add your comments or contact me at welkerswikinomics@gmail.com if you wish to become a contributing author!

So, thanks to you all for everything!

-Jason

Related posts:

1. Welker’s Wikinomics celebrates its 1st birthday with exciting new features for Economics teaches and students
2. Welker’s Wikinomics nominated “Best Educational Wiki 2007″! – go cast your vote!
3. New and upcoming features on Welker’s Wikinomics Blog

Objective: To understand how productive resources, goods and services and money flow from households to firms and from firms to households through voluntary exchanges in a nation’s product and resource markets.

Introduction: This lesson simulates the circular flow of resources, goods and services in a nation with a closed economy and no government sector. The simple circular flow model re-created through this simulation can be graphically represented as follows:

Instructions: The teacher will need to prepare several resources before beginning the simulation. These include:

• Money certificates: These should be printed on green paper (perhaps four certificates per page), then cut into strips approximately the size of a dollar bill. I recommend four “bills” from each sheet of paper. You’ll need a paper cutter to quarter the photocopied sheets once they’re printed. You should print at least 50 sheets of money, creating a total of 200 money certificates. On each certificate should be printed the words:

“This certificate is a money payment for a good or service or a productive resource. In the resource market it represents the wages, interest, rent and profits households receive as income for their resources. In the product market it represents the expenditures households make for goods and services.”

• Resource certificates: On a different color sheet of paper, make approximately 40 copies of a page with the three resources on it, separated vertically: “Land, Labor, Capital”. Each resource should be on its own strip of paper. Make sure you create the same number of each of the three resources. For a class of 20 students, I would recommend making at least 50 copies of each resource (50 lands, 50 capitals, 50 labors, totaling 150 resources in total).
• Product certificates: On yet a different color sheet of paper, print and make approximately 15 copies of a page with the words “Goods and Services” on it four times from top to bottom, so you have a total of 60 “Goods and Services” certificates. Again, use the paper cutter to quarter the pages so you have 60 strips with the words “Goods and Services” on them.

For a class of 20 students, you must create 20 different paper clipped bundles ahead of time. 10 of your students will be “FIRMS” and 10 will be “HOUSEHOLDS”. Each of the households will receive a bundle of resource certificates. Each firm will receive a bundle of money certificates.

• 10 Household bundles: Prepare 10 bundles of resources. Each bundle can contain a random combination of land, capital,and  labor. It is important that some households receive far more productive resources at the start of the simulation than others. For example, you may give one student a bundle with 5 labors, 7 capitals and 8 lands. Another student may receive a bundle with 2 labors, 1 land and 1 capital. This may seem “unfair”, but will play an important role in your post-simulation debrief. Be sure to use ALL of the resources you printed out, so you are sure there is an even number of land, capital, and labor.
• 10 Firm bundles: Each firm is run by an entrepreneur. The entrepreneurs who manage each firm start with a different quantity of financial capital. Divide your 200 money certificates into 10 different bundles, some containing larger amounts of money than others. The “average” entrepreneur will have 20 money certificates to start, but be sure to give some firms far more than this and other firms far less.

The simulation: For the simulation, you will need a large open space. I recommend going outside where there are some trees you can tape signs to, or in a gym or a classroom with the desks moved to the center of the room.

1. Begin by asking students “Who are the two ‘stakeholders’ in a nation’s economy portrayed in the circular flow model?” Once they’ve identified “Firms” and “Households”, have a volunteer tape two signs on walls opposite from one another in your teaching area.
2. Next ask students to identify what it is that firms demand from households, and what it is that households demand from firms. Once they’ve identified “Resources” and “Products”, have a volunteer tape the signs for “Resource Market” and “Product Market” opposite each other in your area. You now have four signs taped to the wall: “Households” and “Firms” are across from one another, and “Resource Market” and “Product Market” are across from one another.
3. Next assign roles: Give each student a letter, either and “H” or an “F”. Half the class will become Households and will re-group at their sign, the other half of the class will be come Firms and meet at their sign. Explain to the Firms that they are entrepreneurs who want to start a business that will produce a good or service. As entrepreneurs, they are putting their own creative ideas towards a business venture, but must acquire land, capital and labor in order to begin producing their good or service.
4. Ask the Households what they want, and where they will get it. They’ll say “Products” and they’ll get them in the “Product Market”. Ask firms what they want and where they’ll get them. They should say “resources” and they’ll get them in the “Resource Market”.
5. Next discuss the motives of firms and households. The entrepreneurs and their firms are seeking to maximize profits in the Product Market, which they will do by minimizing their costs in the Resource Market. Therefore firms must try to acquire the land, labor and capital at the lowest cost possible and then sell their goods and services for the highest price possible. Households are seeking to maximize their incomes in the resource market in order to maximize their consumption of goods and services in the product market. Therefore households should try to sell their resources for the highest price possible and buy their products at the lowest price possible.
6. Ask the students: “Now we’re ready to begin our circular flow, but something is missing. What is it?”. They will know right away that “MONEY” is missing. At this time, distribute the different sized bundles of money to the entrepreneurs. Make each entrepreneur count his or her money so it knows how much it started with. This way each firm will know whether it earns a profit or a loss during the simulation.

Time to FLOW! First comes the RESOURCE MARKET. In order to produce one product, business owners must acquire three resources: one land, one capital and one labor. Make sure they know that they must have one of each to produce one good or service, so that firms do not go out an buy nothing but labor or nothing but capital.

1. The firms and the households must now meet in the resource market.
2. Give the firms five minutes to bargain for and acquire as many resources as they can from household with their limited financial capital.
3. Encourage firms to  ”shop around” until they find a household willing to sell its resources for the lowest cost, or until households find a firm offering the highest income.
4. Once a firm runs out of money, have the entrepreneur come to the “FACTORY” (this is you, the teacher) where the firm will exchange the resources it acquired in the resource market for “Goods and Services” certificates. Remember, one product (G&S certificate) costs three resource certificate, one of each of Land, Labor and Capital.
5. After 5 minutes the resource market is closed and firms must report to the teacher’s “factory” to turn their newly acquired resources into Goods and Services. Give each entrepreneur one “G&S certificate” for each bundle of land, labor and capital the entrepreneur acquired in the resource market. Households should return to their sign and count their money incomes and drool in anticipation as the firms produce their goods and services. Any resources unsold by households or unused by firms must be put aside, these may not be exchanged in the product market.

Time for the PRODUCT MARKET.

1. Remind the households what their motive is in the product market: to acquire the MOST goods and services possible, therefore spend all their money but try to get the lowest price possible.
2. Remind firms what their motive is. EARN A PROFIT! To do this they must now sell their products at the highest price possible.
3. Give the students five minutes to buy and sell goods and services. Encourage the households to “shop around” for bargains. Observe what prices products are selling for between different buyers and sellers.
4. At the end of five minutes, the product market is closed. Send firms back to their sign and households back to their sign.

Analyzing the results:

1. First ask the firms to count their earnings. Determine which firms earned profits and which firms earned losses.
2. Determine how many resourced went unsold in the resource market or were bought by firms and then were unable to be used to produce goods and services.
3. Determine how many goods and services went unsold in the product market. If all goods and services were sold, then determine how much money households had left over and were unable to spend.

Simulation debrief – Economic concepts to discuss: The following are just some of the economic concepts that you can discuss following your circular flow simulation. There may be others, but these are some of the most interesting and important.

• The Circular Flow: Ask students what, exactly, was “flowing” in the circular flow.
  • Resources flowed from households to firms, were turned into goods and services, which then flowed from firms to households.
  • Money flowed in the opposite direction; first from households to firms in the form of Wages, Interest, Rent and Profit (the income payments for the four resources households owned), then from households to firms in the form of expenditures on goods and services, which translate to revenues from firms.

• Efficiency and the PPC: Were there resources that households had in the beginning but were unable to sell in the resource market or resources that firms bought but were unable to use? The existence of unused resources is evidence that our “economy” was producing below its PPC.
  • Discuss with the class how the “unemployed or underemployed resources” represent an “excess supply” of productive capacity in the economy. The existence of unused resources is evidence that the price in the resource market was too high! If the price had been lower, then firms would have demanded a greater quantity of resources and this “excess supply” would have been eliminated.
  • The unused resources represent the inefficiency of the nation’s economy. If the market had been more efficient, then more resources would have been employed by firms and more goods and services could have been produced, meaning the economy would have been producing closer to its PPC.
  • Households with unemployed resources represent unemployment in the economy. There were mismatches in the resource market between firms and households, and the prevailing income level was too high, resulting in an excess supply of resources, i.e. a surplus of land, labor and capital.
• Equilibrium price in the product market: It is possible that following the product market round, some households will have money left to spend yet firms will be sold out of goods and services. This is evidence that the price goods were going for was too low.
  • If households were willing and able to buy, but there was not enough product to sell, then we had excess demand in the product market. The quantity demanded exceeded the quantity supplied.
  • The price in the product market was too low. A price below equilibrium leads to demand". Occurs when the price is below the equilibrium level, for example, when a government imposes a price ceiling in a market.');" onmouseout="tooltip.hide();">shortages. If firms had known there would be households willing to buy, then they would have charged a higher price and the shortage would have been eliminated.
• Inequalities in the distribution of income: Ask students why some households ended up with more goods and services in the end than others? Also, why did some firms end up with greater revenues than others?
  • Some households had higher incomes and thus enjoyed greater levels of consumption because they were endowed with higher quality and a greater quantity of resources to begin with. This is representative of the real world in which not all households have the same education levels, own the same amount of land or have the same amount of financial capital as others. Those with the greatest quality and quantity of resources earn higher incomes in the form of wages, rent and interest and therefore enjoy a higher level of consumption.
  • Some firms ended up with higher revenues than others, which is probably because they started with greater financial capital. The entrepreneurs with access to more financial capital  when starting their business were able to produce more products and earn higher revenues. But an entrepreneur’s having access to more money in the beginning did not guarantee he or she would earn profits! It’s likely that even the smallest firms were able to earn profits, if they were good at negotiating their costs down and their prices up.
• Competition and “creative destruction”: Some firms will make losses while others make profits.
  • Firms that earn big losses will be forced to shut down or become smaller, because they’ll be unable to buy as many resources nor produce as much output in the next round of the circular flow.
  • Firms that earn larger profits will be able to expand and grow since they can reinvest their profits into more inputs and greater output in the future.
  • Competition forces firms to be as efficient as possible. Only firms that produce in the lowest cost manner can survive in a market economy. This is good because it assures that resources will not be wasted and output will be maximized as firms pursue their ultimate motive of profit maximization. I call this Economic Darwinism: “survival of the most efficient”, a key characteristic of market economies.

Other possible questions for discussion: The following questions can be distributed to students following the simulation and assigned as a reflection for the next class period, or put on the board and discussed as a class.

Final thoughts: I have done this circular flow activity countless times with both AP and IB Econ students. Over the years it has evolved each time I’ve done it. I recommend you try it with your students and make small changes where you see they’re needed. Throughout the AP or IB course, however, I always find myself re-visiting our circular flow simulation in lectures, and students always recall immediately what I am referring to since they themselves were the households and firms engaging in voluntary exchanges motivated by their own pursuit of self-interest.

Additional note (and an acknowledgement): My teaching partner and occasional contributor to this blog, Joe Hauet, had the idea of giving the Firm owners the “entrepreneur” badge. My original simulation had “entrepreneurship” as one of the four resources owned by households and sold to firms in the resource market. But Joe keenly pointed out that in fact all firms are ultimately owned by households, and that it is the entrepreneurs who start the firms and then must acquire additional land, labor and capital from households to produce their product. So thanks to Joe for helping make this simulation better!

Related posts:

1. Lesson Plan: Costs of Production Presentation for Y1 IB Economics
2. Lesson plan: Elasticity, exchange rates and the balance of payments – understanding the Marshall Lerner Condition
3. Lesson Plan: Sources of Economic Growth and Development

YouTube - ACDCLeadership’s Channel

More econ review videos from my new favorite YouTube channel, Jacob Clifford’s Econ Concepts in 60 Seconds.

To review for the upcoming test, you will join a small group and watch one of the four videos on the Perfect Competition. After watching and discussing one video with your group, you will be re-assigned to another group with students who watched a different video. You will then lead a short discussion on your original video with your new group.

With your first group – 15 minutes: As your group watches its assigned video, have your notes open in front of you and draw the graphs Mr. Clifford draws along with him. Pause the video where necessary to have time to draw graphs. Take notes while watching the video so you can teach it to another group. With your group, prepare a short discussion of the video’s main points, including:

• What rule or lesson about Perfect Competition does the video focus on?
• What did you already know that this video reminded you of or reinforced your understanding of?
• What did this video introduce that was new to you?
• How were graphs used to teach the concepts?

With your second group – 20 minutes: For the second part of this assignment, there should be four new groups, each including one member of the four original groups.

• Each group member should lead a 2-3 minute discussion of the video he or she watched in the first group.
• Go over each of the discussion points from above.
• Answer any questions your new group members have about video you watched.

Group 1 - The Profit Maximization Rule – MR=MC:

Click here to view the embedded video.

Group 2 - Perfect Competition in the short-run:

Click here to view the embedded video.

Group 3 - Perfect Competition in the long-run:

Click here to view the embedded video.

Group 4 - The Shut-Down Rule in Perfect Competition:

Click here to view the embedded video.

Related posts:

1. Diminishing returns and the short-run costs of production – “Econ Concepts in 60 Seconds”
2. SAS Economists Podcast #10: Perfect competition and comparative advantage in… the World of Warcraft!
3. New tools for the Econ teacher and student: Social bookmarking Site, iPhone App and YouTube Review Videos