Great Ideas for Teaching Economics.

A Pythagorean Lesson on Elasticity.Josef M. Broder, University of Georgia.

I have long been fascinated by Pythagoras' sand‑box proof of his famous geometric theorem. As described in Jacob Bronowski's Ascent of Man, Pythagoras proved his theorem by placing and rearranging small squares and triangles in a sand box. The simplicity of his approach lead me to develop a similar lesson for explaining relationships between elasticity, marginal revenue, and total revenue.

My Pythagorean lesson consists of a metal board upon which three graphs are drawn in a vertical sequence. At the top is a demand schedule, in the center a total revenue schedule, and at the bottom a marginal revenue schedule. Magnetized color‑coded squares and triangles are used to show the relationships between elasticity, total revenue, and marginal revenue.

First, three red rectangles are used to illustrate total revenue associated with P1 on the uppermost demand graph. Next, these rectangles are transferred to the center total revenue graph to plot total revenue associated with P1 and Q1. Returning to the top graph, four green rectangles are used to illustrate total revenue at P2. These rectangles are also transferred to the center graph where a total revenue at P2 and Q2 is plotted. This procedure is then repeated for P3, using three blue rectangles. As the rectangles are arranged on the board, I instruct students to observe changes in total revenue associated with price changes toward and away from unitary elasticity.

Marginal revenue relationships are shown by placing triangles in a step‑wise fashion on the center total revenue graph. The height of each triangle designates the change in total revenue from a change in quantity. Next, these triangles are moved to the lower marginal revenue graph and a marginal revenue function which becomes negative at unitary elasticity is plotted. Given the large price and quantity changes, total revenue squares and marginal revenue triangles are plotted on the midpoints.

This elasticity lesson is simple, straight‑forward and requires a minimum of mathematics. A magnetic board can be viewed upright and works well for large class presentation. Similar models can be constructed on a flat surface or, if one were a true Pythagorean, in a sand box.

Diminishing Marginal Utility.Eric K. Steger, East Central University.

I often use myself as an example to illustrate diminishing marginal returns. I ask my students if they have ever eaten at a restaurant that serves "all you can eat" meals? Most have. I ask them if they ever behave irrationally as I do when I am determined to consume a second or third plate of food? I explain that my marginal utility received for the second plate of food is less than the first but I continue eating up to the point where the marginal utility per plate of food consumed is zero. I do this because the costs of the meal are fixed and therefore the cost per plate consumed falls. I explain that an "all you can eat" offer is a "personal challenge" to me. Occasionally, some students point out that the long run potential costs of this behavior involve obesity, etc.

Humor and Diminishing Returns.Ralph Byrns.

Some students erroneously get the idea that economists assume that marginal returns continuously diminish. To point out that returns may initially increase, but eventually diminish, ask why it some-times takes a few jokes before a stand-up comic has an audience warmed up. (Returns may initially increase.) Point out that, after several jokes, only increasingly funny jokes will rock a crowd with belly laughs. (Diminishing returns) Finally, point out that people's embarrassed titters upon hearing a familiar joke shows that activities that initially yield positive returns may eventually yield only negative marginal returns. Few people find a joke amusing after hearing it the second or third time.

Complementarity and Incompatible Goods.Ralph Byrns.

Elaborate Kelvin Lancaster's idea that goods embody utility relevant attributes that determine price, cross, and income elasticities of demand, how rapidly utility diminishes, whether goods are substitutes or complements, etc. For example, candy has the positive attributes that it tastes good, provides quick energy, etc. It has the negative attributes that its sugar contributes to tooth decay, obesity, etc. The search for new cooking recipes is essentially the search for complementarities among different types of food. Combinations of attributes of certain goods makes the thought of fudge and sardine casseroles repulsive, while hot fudge, bananas, and ice cream sounds like a mouth-watering treat. Similarly, most people avoid wearing stripes with plaids, flip-flops with tuxedos, etc.

Distinguishing Normal, Inferior, And Giffen Goods.Alan Gin, University of San Diego.

Understanding how the substitution and income effects differ among normal, inferior, and Giffen goods is a problem for intermediate micro students. Figure 6-4 aids in resolving this problem by using arrows of different lengths to indicate the direction and relative magnitude of each effect for each type of good. It is most effective if you first distribute copies of the table and then proceed with standard graphical analyses of the substitution and income effects for each good, referring to the table where appropriate. Besides showing the direction and relative magnitude of each effect, the table can be used to emphasize certain important points, such as the fact that the substitution effect is always negative, that a Giffen good is also an inferior good, etc.

Looking for a Good (Enough) Man or Looking for the Best Man.Gary Galles, Pepperdine University and UCLA.

"Let's talk about an error common to the analysis of both romance and business. When a firm is looking to fill a job position or someone is thinking about whom to marry, it is common to hear that they are looking for the best candidate or Mr./Mrs. Right. Such a statement is incorrect. It would be correct in a world of costless perfect information (no uncertainty), but in such a world search would not be necessary. In the real world of uncertainty and often very costly information, however, this is not correct, because the costs of finding out about who is the best match will typically exceed the benefits. A more correct statement would be that you are not looking for the "best man for the job," but for one who is thought to be (when the relevant decision must be made) close enough to the best man that the costs of further search exceed the net benefits of finding someone better."

A statement in class like this one is certain to generate student interest and responses, typically protests that it is incorrect. That is one reason I have found such an approach ideal for introducing issues of costly information and search behavior. It gets students to listen, because it deals with things they care about, --jobs (second) and romance (first) and it can be used to make sense of things they are, or will become, familiar with.

Among the predictable results of uncertainty/imperfect information are:

1. divorce/firings: mistakes get made, and sometimes those involved find it less costly (not costless) to "get out" than to continue the "mistaken" relationship.

2. sometimes the "best one" gets away: you may turn down Mr. Right, because you thought that he wasn't "the one," but further search convinces you he was "good enough." Unfortunately, he may no longer be available.

3. easier divorces (layoffs) mean shorter courtships and more marriages (hires) as well as more divorces, (e.g., mandatory notification or layoff benefits for firms and the number of new hires).

4. prenuptial agreements (dismissal arrangements) lower the costs of marrying the wrong person, in part by controlling for strategic misrepresentation.

5. since perfect information is too costly, you look for lower cost imperfect proxies. Examples include dating behavior, "gossip" from mutual acquaintances, parents, "track record" so far, reputation, appearance...

6. people "fall in love" at school because the information is better (see people under more circumstances, for example) and the costs of acquiring it are lower (cheap dates are okay, built in social arrangements and common experiences, for example).

7. greater potential costs from mistakes, (e.g., AIDS or crucial decision makers) lead to more precautions.

8. appropriable rents exist after specialized investments in the relationship have been made.

More implications can be drawn, limited mainly by your imagination. But the main point of uncertainty/imperfect information and the resulting implications of risk, unavoidable errors, search behavior and mitigating devices (like contracts) will be clearly made. This example can then be concluded by indicating the widespread extent to which the principles derived apply.

The Time Cost of a Consumption Activity.Edward Scahill, University of Scranton.

Several years ago, the Chicago White Sox and the Chicago Cubs were in the unusual positions of being in the thick of their respective pennant races at the same time. As the summer months rolled along, both teams reverted to their usual positions near the bottoms of their divisions. While they were still playing well, an article in the Wall Street Journal noted the increase in attendance at the home parks of both teams. The article also observed that many of the fans that attended the Cubs games (on the north side of Chicago) were either very young or of retirement age, while White Sox games (played on the South side of the city) attracted many blue-collar workers.

After relating this part of the story, I ask why there appeared to be such large differences in the ages of the fans of these teams. After fielding a few possible explanations, I provide a hint: Wrigley Field (home of the Cubs) still is the only major league field without lights, so that all the home games of the Chicago Cubs must be played during daylight. Naturally, the opportunity cost of time is much lower for either a student on summer vacation or a retiree than for a fully employed worker. The full cost of attending a Cubs game, then, is very high for someone who works during the day, while the cost of seeing a White Sox game at night is much lower, even though the money prices of the tickets are similar for both teams.

Graphical Literacy.Michael Kuehlwein, Pomona College.

Graphs can be very informative and we draw heavily on them in introductory courses. But I try to warn my students graphical evidence can only suggest, not prove, the existence of a relationship between two variables. Take the relationship between the number of guns distributed annually in the United States and the number of homicides involving a gun between the years 1985 and 2000. A graph of this relationship every five years looks like the following:

The graph appears to imply that reducing the number of guns sold in our society reduces the murder rate. That may be true, but there are alternative interpretations of these data as well. First, the causation may to the other way: lower murder rates may reduce incentives or citizens to buy guns to protect themselves. That would be an example of reverse causation. Second, these two variables may not be directly related to each other, but may both be influenced by an omitted third variable. One possibility is the aging of the population, which might naturally reduce both gun-related homicides and the number of guns sold in the US. The rate of decrease in our two series appears too high to be completely explained by population aging, but other factors could be involved as well. Perhaps “political correctness” or reduced exposure to guns in our society has increased apprehensions about both owning and using them.

Finally, our two variables may be unrelated to each other, but chance has created the appearance of a significant correlation. Perhaps the real reason homicides have fallen is because of increased use of such drugs as Prozac, or better drugs to deal with other mental illnesses. And reduced danger may cause fewer people to buy guns. This would be an example of spurious correlation between two variables. The watchword is caution in interpreting graphical evidence.

Dynamic Economic Processes: The Bubble and Crash.Mark E. Schaefer, Georgia State University.

The investment accelerator and the cobweb model are two frequently discussed examples of dynamical processes in economics. We need to expand our standard repertoire to include the case of destabilizing speculation or the so‑called "asset bubble." You can count on having enthusiastic student response and an energetic class session when you raise the topic of wide swings in the stock market. An unsustainable rise in the price of one stock or the whole market is often compared to an expanding soap bubble which must finally burst.

You may want to focus the discussion by asking three questions. How does a bubble, or rise, in the price of a stock get started? What inherent internal process will eventually burst any purely speculative bubble in the price of stock? What early warning signal should alert you that the turning point is near, so you can switch sides from "long" to "short"?

The following sketch of a possible bubble may give the students something to sharpen their teeth on. To say that a stock is overvalued we need to know the true value, which can be conceptualized as the present discounted value of the future stream of dividends actually paid out to shareholders. Some will suggest that expected future appreciation of the share price influences present demand for shares, which is probably true, but which is also the conceptual error of double counting which sets the stage for the bubble to even exist.

The first act in the bubble drama is the noticeable rise in the price of the asset. This run‑up may be due to the announcement or rumor of new favorable information. It may be due to a string of random but positive price changes which will occasionally happen by the laws of chance. Or it may be the result of manipulation by a small close‑knit group of market participants who intend to bilk the large uniformed but greedy mass.

The second act starts when speculators notice and pile on, leveraging themselves by using borrowed money ("call" loans or overnight loans which can be immediately recalled, perhaps forcing the borrower to sell in a declining market) whose interest rate is variable but below the expected appreciation rate of the asset. This frenzy of buying to beat the expected price rise causes the market price to overshoot the true value of the asset, creating a bubble which will eventually burst. The hysteria may become so intense that lenders also switch to borrowing and speculating in an attempt to capture the rates of return that they see their customers reaping. So the interest rate rises, perhaps drastically.

The third act of the drama begins when the interest rate on loans eventually exceeds the appreciation rate of the stock. Then the leveraged speculators are suddenly losing money. They are being squeezed and must sell. The stock stops rising, hesitates briefly at its peak and begins to fall. This turning point is followed by the fourth act in which panic sets in as highly levered buyers are forced to sell to meet margin requirements on the stock they have purchased on borrowed money. As they trample on each other trying to get out of the stock, its market price plummets.

This crash in value of the asset leads to the fifth and final act in which the price falls below the true value. If the price ever begins a recovery, the trend of rising price toward true value is noticed by speculators and act one of the drama begins again. We know the turning point is near when the interest rate on loans begins to rise and approach the appreciation rate of the stock. Appropriate defensive action should then be taken.

The Meaning of Money.Salvatore Schiavo‑Campo, Economic Research Services.

While talking in generalities at the beginning of your first lecture on the origins and meaning of money, absent‑mindedly shred a blank piece of white paper. Then, still talking, again as if just fiddling around, fish a dollar bill out of your pocket and tear it up very slowly. I guarantee strange looks and horrified gasps. Briefly pause, and ask: "What's the matter? Why should it seem normal to tear up a plain piece of paper but strange, almost sinful, to destroy a piece of green paper? Is it because it's green? (No, you would not have been shocked if it had been green notepaper). Is it because there is writing on it? (No, you would have been blasé if it had been a piece of old newspaper). Is it because the government printed it? (It would not have bothered them if you had torn up, e.g., a blank IRS Form 1040.) The essential difference is that you can exchange the green piece of paper with George Washington's picture on it for something that you may want, while nobody would accept the blank piece of white paper in exchange for anything useful. The normal lecture about the various functions of money as a medium of exchange and store of value can then take place, with frequent reminders that this special printed green paper is money because and only because people accept it as money. (An instructor who objects to destroying a dollar can, with a little practice, achieve the same effect by tearing it carefully in half and then taping it back together after class).

Gresham's Law.Jim Cobbe, Florida State University.

There are two anecdotes that illustrate different aspects of Gresham's law. First, which money is bad may depend on the individual. In 1945, after the atom bombs ended World War II, Indonesia (the Netherlands East Indies) was occupied by a British Military Administration (BMA) that took the surrender of the Japanese occupying forces. For a while there were four different paper moneys in circulation: pre‑War NEI Guilders, the only currency which the returning and released Dutch would accept; Occupation Japanese money, which was available in abundance and had been the official money for three and a half years; British Military scrip in which the British troops were paid and with which the BMA paid for its purchases; and new rupiahs, issued by the rebels fighting for independence from the Dutch, acceptance of which was encouraged by the rebels' guns. Vendors typically quoted prices in the money they were most willing to accept, or that they thought the purchaser was most likely to proffer; prices were always negotiable, and the exchange rates between moneys varied between individuals and from day to day. Allegedly, some members of the occupying British forces were able to acquire substantial quantities of goods starting with very small amounts of BMA scrip and then completing long series of cross‑transactions between different moneys with different individuals; others found themselves holding large nominal sums in, e.g., Japanese occupation money or rebel rupiahs, which became almost worthless as the Dutch authorities reestablished themselves. But which money was bad depended on individuals; Japanese troops continued to regard their money as good, and rebels and their sympathizers regarded theirs as good, even after most of the population was refusing to accept them. Hence, the opportunities exist to gain by roundabout transactions.

The second anecdote concerns the failure of the first attempt to introduce paper currency in Tanganyika (now Tanzania). It failed, not because the currency did not maintain its purchasing power but for the much simpler reason that the paper itself was not sufficiently durable in the environmental conditions. It was liable to rot, attack by insects, and general physical deterioration; it did not represent a reliable store of value because it was too likely to literally fall apart and become unacceptable. Hence, paper money was the bad money, driven out of circulation by coins, which were physically more durable, even though in purchasing power terms the two moneys remained at par with each other.

Gresham's Law In Bolivia.Walton M. Padelford, Union University.

While working in Bolivia several years ago, I noticed an example of Gresham's Law operating in paper currency. Bolivian paper notes were printed by the Thomas LaRue Co. of London, but unlike the U.S. dollar, there was no simple mechanism for destroying old notes and issuing new ones. This resulted in some paper currency becoming very worn and tattered, often raggedly repaired with tape. Bills that became too worn would eventually circulate only at a discount. That is, if one day you will present a worn 10 peso bill to a merchant, he might have offered you only 8 pesos credit for it. This resulted in a game of paper money‑musical chairs. The object of the game was to pass bad currency as soon as possible. Bad money then circulated much faster than good money; or as Gresham would have it, bad money drives good money out of circulation.

Fractional Reserve Banking in the Salad Oil Trade.Stanley Kaish, Western Illinois University.

When I teach the fractional reserve banking system I remind the students that banking is the only profession in which you can sell the same thing twice and not get arrested. When you lend excess reserves, you have sold the right to demand the same deposits to both the original depositor and the borrower.

Back in the 1960's Anthony DeAngelis, known as the Salad Oil King, practiced fractional reserve banking with his salad oil inventories. He learned, as did the early goldsmiths, that 1) the commodity deposited is fungible, and 2) not everyone wanted to withdraw it at the same time. Mr. DeAngelis ran Allied Crude Vegetable Oil Company which was a tank farm, i.e., a warehouse for salad oil. When some 1 billion pounds of oil were deposited with him to store he issued warehouse receipts which guaranteed the presence of the oil and, not unlike bank pass books, could be used as collateral for loans by the owner depositors of the oil. Mr. DeAngelis then sold 90%* of the oil left in his trust to other buyers, in effect treating it as excess reserves. The other 10% he kept as required reserves to show any owner who came to check up on his oil, assuring the person examining it that the oil being shown did indeed belong to him. As long as all the owners didn't want their oil at once, the fractional reserve system worked as well in oil as it did in banking. Alas, one day all the owners did want the oil, and while the bankers enjoy their country clubs, fractional reserve banking ended up putting the Salad King in jail.

Elasticity and the Laffer Curve.Robert Schenk, Saint Joseph's College.

The idea behind the Laffer Curve‑‑that a decrease in tax rates may increase tax revenue‑‑is an interesting application of the concept of elasticity. The Laffer Curve points out that the government faces a "pricing" problem much like the one a business faces. If a business raises the price of a product, buyer behavior will be affected and revenue will rise or fall depending on the responsiveness of people to the change. When the government raises the cost of an activity by taxing it more, it will also affect people's behavior. As in the case of the business, if people are highly responsive to the change in cost, revenues will decline. In fact the major difference between the "pricing" problems of business and government is that business should avoid inelastic portions of the demand curve while the government should avoid elastic portions (unless the purpose of the tax is to discourage undesirable behavior rather than raise revenue).

Prices in the Good Old Days.Michael Kuehlwein, Pomona College.

Prices have risen steadily in the US economy since WWII. In the early 1990’s prices were roughly 8 times what they were back in 1940. To illustrate what this means, I cite some 1940 prices from an old Statistical Abstract of the United States: potatoes: 2 cents/lb, flour: 4 cents/lb, milk (delivered fresh!): 25 cents/half gallon, sugar: 5 cents/lb, chuck roast: 22 cents/lb, leg of lamb (if you really wanted to splurge): 30 cents/lb, bread: 8 cents/loaf, stampers were 3 cents a letter and postcards were a penny (the penny postcard), the median cost of a house: $2,900, the median monthly rent: $24, the average price of a new car: $650. This usually gives them some appreciation of the effects of inflation.

The Demand for Inflation.Ralph T. Byrns.

Here is a suggestion for instructors who enjoy counterintuitive lectures to stimulate student thought and discussion. It depends on a view that some people might perceive as outrageous to rationalize the concept that people demand inflationary policies. Specifically, it is the possibility that some (many?) people equate success with achieving numerical goals, and that nominal goals move upwards (or if the desire is for smaller numbers, down) gradually as monetary targets are achieved. That is, we have inflation (or deflation, where appropriate) in many scoring systems because people like big (small) numbers, and policy makers are prone to accommodate these desires. The following evidence can be cited:

a. Grade Inflation. Students want higher grades. Professors (rule makers) have complied with this want by gradually (all A's would be too flagrant, and people would realize that the game had changed) lowering standards and raising grade averages. In 1965, the median GPAs of graduating seniors were approximately 2.2 on a 4.0 scale; by 1982, median GPAs had reached 2.9+ on a 4.0 scale.

b. Basketball. The fans' desires for higher scores have led pro basketball to outlaw the zone defense, adopt a 24 second clock, and award 3 points (instead of 2) for baskets scored from over 22' away. Result: even losing teams typically score over 100 points per game. In the college game, a shot clock and a 3‑point shot from 20' were introduced during 1986‑87 to favor offensive scoring and speed up the game.

c. Football. Similar desires by fans resulted in numerous rules changes favoring the offense over the defense. Offensive linemen can `hold' on passing downs; defensive backs are allowed only limited contact with potential pass receivers, etc. Result: offensive statistical records (yardage, passing, etc.) are shattered regularly, and average points scored in professional football games have soared over the decades.

d. Track and Field Events. Indoor tracks are now `tuned' with steel springs so that sprinters run faster and faster. (If the boards are too stiff, runners `cushion' their strides and speeds fall; if the boards are too limber, the `mushy' feel slows runners down.) Pole vaulting: the poles permissibly used have evolved from bamboo and aluminum to extremely flexible fiber glass, with the permissible amount of flexibility being increased over time. Result: record heights have risen by 5' or so over the past 40 years.

e. Pinball and Electronic Games. In the early 1950s, winning a bonus pinball game required a score of roughly 100 points on a typical machine. Pinball addicts kept track of record scores. The manufacturers recognized that players wanted higher scores, so the values of bumpers and bonus rollovers were raised, increasing the number of points required to win games, but with little or no change in the difficulty encountered in doing so. Result: winning scores went from 100 to 400 to 1,000 to 10,000 to 100,000 to 1,000,000 to 10 million to 100 million points, in roughly three year increments. The same phenomenon occurred, but even faster, with computerized arcade games; each generation of games has easier scoring possibilities.

f. Dress Sizes. This is a slightly perverse example. Many women want to wear lower dress sizes, and dressmakers have accommodated them. What was a size 16 in the mid‑1950s is now a size 10. More expensive clothes lead the trend towards lower numbers, being `roomier' for a given nominal size than cheaper clothes. This might seem to be a counterexample, but conforms to the general idea exposited here that numbers do matter, and people's desires for `better' numbers are accommodated by those who govern what the numbers are.

g. Income. People commonly measure their success by their incomes. Many want `to do better' than their parents, or feel cheated and unappreciated if they don't get raises each year. The regulators of this `income game' (the FED, politicians, etc.) accommodate these desires through inflationary policies. (This motive may help explain why wages appear to be relatively sticky downward and flexible upward).

Lessons from Edsels for Macroeconomics.Anthony K. Lima, California State University‑Hayward.

While most business students understand why they need to study micro, many have serious doubts about the relevance of macro for them. This example may not convince them of the value of the entire course, but generally quiets their more vigorous objections:

The Edsel was introduced by the Ford Motor Company in 1956, and was named after Henry Ford's younger brother, Edsel Ford. This was less than the ideal time to launch a new car model, because its maiden voyage sailed right into the teeth of the 1957‑58 recession. It was one of the more remarkable financial failures ever for new product introduction. The central point is that business planning is likely to fail unless the general macroeconomic environment is taken into account. Some knowledge of macroeconomics is necessary for the business person to successfully plan production or forecast demand.

This brief example can be extended in several directions. First, it can be used to point out the procyclical nature of the demands for consumer durables; that such demands generally fluctuate much more than the business cycle itself. This can lead to a discussion of the role of durability in determining the income elasticity of demand. A second direction which the discussion can take is the reason for the 1957‑58 recession. This will typically revolve around the issue of fiscal policy and the role of government in the economy. It may be possible, depending on the types of students you have, to introduce the simple multiplier concept at this point. It's a good example.

Depressions and Income Elasticities of Demand.Ralph T. Byrns.

Discussions of the social consequences of recessions or depressions can lead into informal analysis of the income elasticities of demand (avoid this terminology unless most of your students have already taken principles of microeconomics) for such things as marriages, divorces, children, schooling, etc. Ask students for their impressions of why suicides, crime, physical and mental illness, and other maladies rise when economic activity falls, and why marriages, divorces, and birth rates tend to fall when the economy is in the doldrums. This discussion aids students who have little appreciation of the effects of the Great Depression.

Illustrating the Velocity of Money.Roger M. Clites, Clarke College.

I simply hold up one finger and say, "Fisher could have said, 'One dollar spent and re-spent a total of five times has just as much impact on the economy as (hold up all digits on one hand) a five dollar bill spent one time.'" He pointed out that it was not only the size of the money supply that impacted on the economy. How rapidly it passed from hand to hand also affects, prices, wages, the employment level output, etc.

The Velocity of Turnover.Gautam Mukerjee, University of Pittsburgh.

To explain the velocity concept I resort to a little experiment. I ask my students how long each of them keeps a dollar before spending it. The answers are usually in days or hours. The holding times are then converted into the same unit, that is, in days or hours, and the average is found. A standard length of time such as a week or month is then divided by the average for the class. The result is the velocity of turnover during the specified period of time. I then show how during periods of uncertainty the average holding time of a dollar is likely to be higher, since one is unlikely to go shopping immediately after being laid off, thus leading to a lower velocity. Similarly, times of prosperity and growth are likely to witness a higher velocity of turnover.

Pollution and Production Possibilities.John P. Cochran, Metropolitan State College‑Denver.

Many students believe that pollution be should be reduced to zero. The opportunity cost concept and the production possibility frontier can be used to dispel this fallacy. Draw a PPF with GDP on the horizontal axis and reduction of pollution on the vertical axis. The students should quickly see that reduced output is an opportunity cost of pollution and with current technology zero pollution would probably entail zero output.

Competition vs. Competing.Richard B. McKenzie, University of California at Irvine.

Students often have difficulty comprehending the dilemma individual competitors face in the market because they are usually exposed only to the conditions for competitive equilibria. One way to offer students a brief experience as competitors is to give them a chance to bid for a given amount of money, say, $2, requiring every student to pay the auctioneer the amounts bid, with the understanding that only the highest bidder will receive the "kitty." Bids are collected on signed slips of paper indicating that the student understands the rules of the game. After the first round of bidding is completed with the professor in the room, the professor leaves the room giving the students a chance to collude in their bids. (Before leaving, chide the students on the expected inability to trust one another).

This game highlights several important points: (1) the dilemma each student faces in attempting to outdo competitors, (2) the pressure on competitors to collude and the hurdles confronted when many competitors try to form an effective cartel, (3) the benefits of monopoly power, and (4) the consequences of "rent seeking." (In classes of over 30 students, the total bids usually exceed the amount up for bid by several times. The professor should expect a profit and plan to give it away (without telling the students beforehand). This game was originated by Geoffrey Brennan at VPI.

Like Ants to a Picnic.Ki Hoon Kim, Central Connecticut State University.

When we drop some cookie crumbs on the floor, what do they attract? Ants, of course. In competitive markets, the "ants" are the firms and the crumbs are the excess profits. Ants will come to the place until all the crumbs are gone. Firms will enter the industry until all excess profits are zero. This is possible because competition prevails. When there are no more crumbs, no more ants will come‑‑when there are no excess profits, the entry of firms will stop.

Examples of Price Discrimination.Mark Zupan, University of Arizona.

Among the examples of price discrimination that I provide my students are the following:

1. College tuition‑‑I lead into this example by asking my students whether they are all paying an identical price for getting the same sheepskin. I also ask them how schools acquire information on the prices different people are willing to pay for going to college. Answer: the detailed financial aid forms people have to fill out when applying for tuition remission.

2. Airline tickets whose prices depend on such factors as the age of the passenger, (e.g., senior citizen or student fares), how many days prior to the flight the ticket is purchased, and whether the passenger stays over on a Saturday. I tell my students how, even with the typical restrictions that are imposed, airlines are not always able to prevent resale. Major corporations, for example, that consistently fly 10 people back‑and‑forth on an daily basis betweenNew York and Chicago, can obtain the deeper discount, stay‑though‑Saturday fares even though their employees never stay over the weekend. The way this can be done is by consistently buying 10 round‑trip, stay‑through‑Saturday tickets, unstapling the outgoing and return portions of each ticket with a return portion from a ticket whose outgoing reservation was for a flight prior to the most recent Saturday night.

3. Season passes to Disneyland and Magic Mountain;

4. Magazine subscription renewal offers that offer a lower price the longer you refrain from renewing I bring in an example of how a magazine kept on sending me renewal notices and kept on lowering the price they offered the longer I did not respond.

5. The book publisher policy of printing a more expensive hardbound version of a book first and then, several months later, issuing a less‑expensive paperback version‑I tell my class about how I fought a losing battle over holding out and waiting for the paper‑back version of Tom Clancy's Patriot Games to come out. For two months after reading Clancy's Red Storm Rising and The Hunt for Red October I stuck to my guns and would walk by the campus bookstore and just glance at the display of Patriot Games in the main window. And then my time‑varying preferences got the best of me.

6. Economic periodical prices that depend on whether one is a library, a full professor, an associate professor, an assistant professor or a graduate student‑I bring in examples from AER and JPE.

7. Frequent flyer programs for airlines and frequent stayer programs offered by hotel chains‑A recent Wall Street Journal article pointed out that there are now also frequent parker programs offered by certain parking lots located near major metropolitan airports.

8. Car selling techniques‑‑Car dealers manage to sell the same model at very different prices. I am always amazed at the statistics concerning the number of people who buy a car at the full, list price. All too few people seem to haggle the price down. During the haggling period, moreover, many dealerships employ a method for finding out how much a customer is willing to pay by having the salesperson act as a supposed intermediary between the customer and the dealership owner. After getting the customer to reveal his/her bid, the salesperson typically goes off to the dealership owner to plead the customer's case. Quite frequently, I suspect, such a technique serves to make the customer sweat, allows the salesperson and owner to share information about the customer and to plot selling strategy, and ultimately decreases the extent to which a customer is willing to haggle.

Permanent International Seignorage.Robert T. Averitt, Smith College.

I tell the following story when discussing international exchange markets. One of four friends dies. The three remaining friends decide to honor their friendship while standing at the open grave. The first friend drops a $100 bill into the open grave. The second friend does the same. The third friend does not have a $100 bill, so he writes the deceased a check for $100 and drops the check in the grave. Then the open grave is covered. The first two friends have lowered their net worth by $100, the third friend has not. Dollars in international trade are like checks. If dollars do not return to the United States as claims on U.S. goods and services, the Americans who spent the dollars receive valuable goods or services while the U.S. economy only gives up money, a commodity with an extremely low marginal cost of production.

A Strong Currency for a Net Importer.Gautam Mukerjee, University of Pittsburgh‑Bradford.

I explain the need for a strong currency for a country such as Great Britain by using the marriage of Prince Charles and Lady Diana as an example. I try to impress on the students how the British government saw the marriage as an opportunity to boost tourism and the publicity department steeped the interest of foreigners through carefully planted mysteries about the wedding dress and other paraphernalia of the wedding. All this was aimed at strengthening an all too weak British currency in an economy riddled with inflation. Although the campaign to promote tourism was not too successful in the wake of terrorism, this example shows how a fascination with royalty may be tapped for its economic potential.

A Story of Economic Thought.Lawrence H. Hadley, The University of Dayton.

In the beginning God created Adam Smith,

And Adam created an invisible hand,

And every man pursued his own self‑interest,

And labor was divided,

And nations became wealthy,

While the invisible hand worked together for the good of all,

And thus did Adam create economics,

And God saw that it was good, but naive.

So on the second day, God created Ricardo,

And Ricardo tasted the forbidden fruit of income distribution,

And the population increased rapidly,

And the wages of workers stagnated,

And people demanded more food from the marginal land,

And the rents of landlords increased greatly,

And the returns to nations diminished,

And God saw that it was dismal.

So on the third day, God created Marx,

And labor created all that was of value,

But labor was denied this value by greedy capitalists,

And capitalists increased their surplus by exploitation,

And thus was created the reserve army of the unemployed,

And labor was united,

But the potential for social revolt became great,

And God saw that it was upsetting.

So on the fourth day, God created Keynes,

And there was a Great Depression on the land,

And the reserve army of unemployed suffered from sticky wages,

And Keynes saw that there was insufficient aggregate demand,

And the invisible hand did not work,

so Keynes sent the government to replace the invisible hand,

And the government tried to represent God's goodness on earth,

But God saw that it was depressing.

So on the fifth day, God created Friedman,

And Friedman tried to rediscover the invisible hand,

And he called it the constant growth of the money supply,

And he decreed that the demand for money would be stable,

And this decree made the velocity of money stand still,

And Money determined everything,

And thus Friedman determined the power of money,

But God saw that money was the root of all evil.

So on the sixth day, God created Laffer,

And Laffer also tried to rediscover the invisible hand,

And he called it lower marginal tax rates,

And workers were going to work harder,

And households were going to increase savings,

And businesses were going to increase investment,

And supply was to come forth,

But God saw that it was marginal.

Then on the seventh day, God would have created Zachary Smith,

And God would have imparted to him the truth,

And Zachary would have used this truth to build a model,

And this model would have unified economists,

And all would have been one.

But it was the seventh day,

So God rested in equilibrium,

Leaving economics in disequilibrium.