Aug 14 2012

## My first Economics lesson – Scarce Chairs!!

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.
The Economist’s Solution:
• Once the students have voted on their favorite solution, share with them the economist’s favorite solution. It is known as a sealed-bid auction.
• Give each student a slip of scrap paper and have him write two things: 1) His name, and 2) the maximum price he would be willing and able to pay each class period to have a chair to sit on.
• Collect the results, and in front of the students, organize their bids from highest to lowest. If there is a tie on the margin, have the students whose bids were identical bid again, writing their highest price on the back of the same slip of paper, then re-rank.
• The students with the highest bids will get a chair! For example, I had 17 students, and only 8 chairs. The highest bid was \$10, while three students were not willing to pay anything. Four kids were willing to pay \$1, but there were only two chair left at that point. When they re-bid, one was willing to pay \$2, one \$1.75, \$1.25 and \$1.20. Therefore, the two remaining chairs went to the students willing to pay \$2 and \$1.75.
• Finally, tell the winners that they can take a seat, and that everyone else must stand! At this point, of course, you can send the lowest bidders out to fetch the missing chairs and begin your debrief.
Economic concepts illustrated by the Scarce Chairs exercise:

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.

• 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.

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

### 33 Responses to “My first Economics lesson – Scarce Chairs!!”

1. Andyon 16 Aug 2011 at 3:44 pm

I like the idea, although I don't have a place to stash the chairs. I'm kind of surprised that you got realistic bids, since I'm sure they knew they wouldn't have to pay it.

2. Nickon 19 Aug 2011 at 4:12 am

I agree. I will try it next week and just hope the kids go along with the game.

3. Jason Welkeron 19 Aug 2011 at 1:10 pm

I used this lesson in 3 classes and the kids all went along with it! There were several kids who don't know me at all who actually thought there really would be no chairs and that they were really bidding for the right to sit down! The average bid was in the \$2 range, I would guess, very reasonable! Give it a try, it was a blast!

4. Mary Gibsonon 22 Aug 2011 at 3:23 pm

Thanks for this great idea. I will use it on day 1.

Also, many thanks for all that you do in the name of Economics education!

Mary Gibson

5. Donna Fieldingon 22 Aug 2011 at 3:52 pm

I think on the very first day, the kids will buy into it — I'm going to try it. I know exactly where to put the chairs.

6. Laura robleeon 22 Aug 2011 at 6:54 pm

Thank you for the great lesson. I will be using it next week when we start. Although I have a very small class I think the point will be well received. This makes the introduction to the subject fun. Thanks again. Will share my results for a small class.

7. Paduanoon 22 Aug 2011 at 9:38 pm

Yes, actually this is a variation of a lesson created about a decade ago by a college professor where he "auctions" off the chairs and the students come to realize all of the economic terms you have posted. I have been using this for about 6 years and I think it is a wonderful way to get the students thinking in economic terms

8. Michaelon 23 Aug 2011 at 6:47 pm

I have similarly been auctioning off one "A" on the supply & demand unit, as an intro to that unit. Every year the students begin the closed-bid auction by thinking I'm joking, but as I'm passing out the slips of paper I talk about the process for handing out the A and that the students will still be required to complete their homework during the unit, but on the test they will simply have an A put at the top. As I talk about it more, the student faces turn to confused, then hopeful, then all-out giddy that I might be serious.

Of course, the top bit is always in the neighborhood of \$100-200, and I've never had the winner pay-up so I've never been faced with having to tell the student that I can't sell a grade. But it sure does get them hooked into the activity!

9. Katieon 23 Aug 2011 at 6:57 pm

For introducing scarcity and promoting socialism, this is a good lesson. For introducing the free market, it neglects to mention that when resources are allocated most efficiently, the poor are the wealthiest poor in the world. The poor benefit most from free markets.

In freer countries, most of the poor could bring in their own chair. Compare this situation to countries where goods are assigned by the government. There, only corrupt government officials and their relatives would receive the chairs.

To learn more about how and why the poor fair better when private property rights are respected, look at the lectures here:

10. Jason Welkeron 24 Aug 2011 at 11:00 am

Michael, I love the idea of auctioning off on A… classic!

Katie, interesting insights, I agree that a society which respects private property rights ultimately leads to greater prosperity, even among the poor. But how do we establish property rights in the first place? That was one of the conversations that arose from the Scarce Chairs activity. Some suggestions were that a "dictator" be assigned the right to allocate chairs every day, others were that each chair would be allocated to a pair of students, who would determine daily who would get the chair in a bi-lateral manner.

The auction solution established property rights in an efficient manner, because those who are willing to pay most get the right to have a chair; but is it "fair" to the poor? The students with lesser means are not able to pay as much as the richer students, so the auction reinforces the income discrepancies that already exist because the rich will get chairs and the poor will not.

So how do we establish property rights "fairly" when they do not already exist? Sounds like a socialist solution may be most fair, even if it is inefficient…

11. Katieon 24 Aug 2011 at 4:40 pm

Hello again. You wrote:

"So how do we establish property rights “fairly” when they do not already exist? Sounds like a socialist solution may be most fair, even if it is inefficient…"

This is precisely what Karl Marx promoted in his Communist Manifesto. The amount of death and suffering that has resulted from these philosophies is unimaginable.

You are neglecting one of the factors of production: entrepreneurship.

The situation you describe, handing out chairs to those with the most money (or most political power), best reflects the way chairs are allocated in a dictatorship, where not everyone is able to afford a chair because rigid class structures have resulted in an economy functioning well below the production possibilities curve. In a market economy the difference between rich and poor is on the level of first class vs. coach class airline tickets. \$3/ day, the amount many poor in market economies spend on candy, will pay for an airline ticket halfway around the world once per year, and chairs are enjoyed by all. This is an excellent opportunity to teach tradeoffs. What daily expenses do you have that you could give up to obtain a chair?

Let's place the incentives properly, and see what happens. Rather than having students buy/rent chairs using their parents' money, have students earn chairs through productive labor or trade of goods. A system that rewards productivity (a market economy) results in much more upward mobility than any other system. This is a great opportunity to introduce the benefits of free trade, as students see that chairs can be earned in any number of ways. Soon you will find that the chair becomes an inferior good, and recliners/couches are vying for space. Isn't it wonderful that people are different, so everyone can buy/rent a chair (at the minimum) using his/her comparative advantage in a chosen area?

12. Michaelon 24 Aug 2011 at 5:34 pm

One other cool note about the "A Auction." There is clearly an inverse relationship between bid and Cumulative GPA/Current grade in the course. This leads to a discussion about opportunity cost and marginal utility.

13. Molly Sasoon 25 Aug 2011 at 9:46 am

This was great, Jason, thank you. Afterwards I realized that it would have been easier to have hidden half the textbooks I was about to distribute, since the students (their first day at school, let along their first economics class) were a bit bemused to be left standing. Nonetheless, there were many useful aspects and I hope they will recall the activity when we do consumer surplus.

a) What kind of scarce resource are chairs? (Ans: Capital to further their acquisition of knowledge).

b) Why did some students bid really high? (Ans: Richer and/or because of the high value they placed on comfort.)

c) What did I assume? (Ans: that students had the cash available!–no asymetric or imperfect information.

d) Why is society on the whole better off (allocative efficiency) with the market solution? (Ans: It has benefited to the extent that if we gave chairs to those who were only willing to pay \$1, then their potential total value to society is not being maximized.)

I drew a simple market model–perfectly inelastic supply of chairs at 10 and a demand function that showed all the bids above and below the equilibrium. (It needed a log scale on the vertical axis!)

PS I shall also use Michael's diminishing MU when one's grade average is already high. I'm bored with being "sick of too much chocolate", which is a lie in any case.

14. Danielon 31 Aug 2011 at 1:34 pm

Great lesson! I do a similar case study on rationing scarce resources by discussing how countries decided to allocate the swine flu vaccine several years ago. http://www.fte.org/lessons-from-the-flu-epidemic/ However, I had them evaluate each method using three criteria, not just two: efficiency, equity, and freedom. When I did activities like this in the past I found that the efficiency vs. equity dichotomy only took students so far. For example, the method of "someone decides" may both be efficient and quite fair (the dictator looks at who appears to need the resource the most and allocates the resource accordingly). But, this method allows minimal freedom for participants to opt in or opt. You get the vaccine whether you want it or not. I found students quite suspicious of market rationing when I first did this activity using only the efficiency and equity criteria, but when I had them think also in terms of "freedom" I observed what I felt to be a healthy open-mindedness (though not complete buy-in) to markets.

15. Laura Robleeon 03 Sep 2011 at 3:21 pm

Just wanted to let you know that I tried the chair lesson on my first day of class. Even though I have a small class, the kids loved it. I had some great solutions and great questions ensued that made the rest of the class go very quickly. I also showed The Standup Economist video on Mankiw's top ten. The kids laughed the whole time. They really seemed to have a firm grasp. I also had them read over the summer Naked Economics. It was a great first day. Thank you for all your help. I would not have made it through last year (my first year teaching AP) without all of your help.

16. Rosaon 12 Sep 2012 at 3:57 am

So Happy I found this blog! 2nd year teaching Econ ~ time to adjust plans from last year. Thank you! Thank you!

17. home tutoron 17 Sep 2012 at 10:33 am

I like the idea, although I don't have a place to stash the chairs.

18. Samon 06 May 2014 at 12:18 am

Every day thousands of Americans default on their car loans or lease payments. As a result their new or used cars get repossessed or seized by financial institutions and auctioned off in a hurry because the cost of storing the cars outweighs the banks' ability to try to make the lost money back same with police auctions, etc. government auctions online

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