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Equilibrium and Efficiency

Textbook Chapter: Chapters 2 & 3

MobLab Game: Competitive Market

Key Teaching Points:

  • The “invisible hand” of the market: how individual profit maximization leads to competitive market equilibrium.
  • Price discovery: the equilibrium market-clearing price results from the valuations of different buyers and costs of different sellers.
  • Gains from trade (i.e., consumer and producer surplus).
  • Shifts in either supply or demand change equilibrium outcomes.

Market Interventions

Textbook Chapter: Chapters 2 & 3

MobLab Game: Competitive Market (with interventions)

Key Teaching Points:

  • Government interventions (per-unit taxes, subsidies, price ceilings and floors) alter equilibrium outcomes.
  • Equilibrium outcomes do not depend on whether buyers or sellers pay the tax.
  • The difference between tax incidence and who pays the tax.
  • Relative elasticities determine incidence of a tax or subsidy.
  • Excess supply (price floors) and excess demand (price ceilings).
  • The efficiency implications of government interventions.

Utility Maximization

Textbook Chapter: Chapter 4

MobLab Game: Consumer Choice: Cobb-Douglas

Key Teaching Points:

  • Become familiar with the Cobb Douglas utility function.
  • Monotonic transformations of a utility function do not affect the utility-maximizing consumption bundle.
  • Utility maximization can be achieved by sequentially choosing the item with the highest marginal utility per dollar.

Firm Behavior in a Competitive Market

Textbook Chapter: Chapter 8

MobLab Game: Production, Entry & Exit

Key Teaching Points:

  • Short run profit maximization involves thinking at the margin.
  • In the long run equilibrium of a competitive market with identical firms, all firms earn zero economic profits.

Monopoly Pricing

Textbook Chapter: Chapter 9

MobLab Game: Cournot (with Group Size=1)

Key Teaching Points:

  • Monopolies restrict output in order to increase price.
  • The tension between the quantity price effects of increased output.

Oligopoly and Collusion

Textbook Chapter: Chapter 11

MobLab Game: Cournot

Key Teaching Points:

  • The underlying logic of the Cournot model: how market price is determined by aggregate output.
  • The equilibrium outcomes of Cournot competition.
  • Repeat interaction may lead to collusive behavior.

Game Theory

Textbook Chapter: Chapter 12

MobLab Game: Prisoner’s Dilemma (Push/Pull)

Key Teaching Points:

  • Key features of games: payoff matrices, best responses and dominant strategies.
  • Identification of the Nash equilibrium.
  • The (sometimes) conflicting incentives of cooperation and self-interest.
  • Repeated play may lead to more cooperative outcomes.

Tradeoffs Involving Risk and Time

Textbook Chapter: Chapter 14

MobLab Game: Bomb Risk-Game

Key Teaching Points:

  • Helps the player understand expected value and thinking on the margin.
  • Helps a player understand her own preferences towards risk, and how risk attitudes vary across a population.

Asymmetric Information

Textbook Chapter: Chapter 16

MobLab Game: Market for Lemons

Key Teaching Points:

  • Experience in a market with asymmetric information.
  • Asymmetric information may lead to adverse selection and market failure.

Externalities

Textbook Chapter: Chapter 17

MobLab Game: Externalities with Policy Interventions

Key Teaching Points:

  • With externalities, the equilibrium of a competitive market without interventions is inefficient.
  • By reducing transactions, a tax can increase efficiency (total surplus) in a market with a negative externality
  • Marketable permits for an activity generating a negative externality leads to efficiently reducing that activity.

Public Goods

Textbook Chapter: Chapter 17

MobLab Game: Linear Public Goods

Key Teaching Points:

  • Highlights the features of public goods: non-rival and non-excludable.
  • Demonstrates the distinction between private and social benefits of public goods.
  • Shows how individual profit maximization leads to the free-rider problem.

Bargaining

Textbook Chapter: Chapter 18

MobLab Game: Ultimatum Game

Key Teaching Points:

  • Students think through the logic of backward induction.
  • Demonstrates that preferences for fairness are sufficiently strong to cause people to reject beneficial offers.

Behavioral Economics

Textbook Chapter: Chapter 18

MobLab Game: Behavioral Economics Template

Key Teaching Points:

  • Behavioral economics templates allow professors to explore framing effects, heuristics, and biases with their students including representativeness, anchoring, availability, and more. Each of these help to illustrate departures from the standard rational choice model.