Tuesday April 3rd Warm Up: What is Economics? How do you feel about Economics?

Tuesday April 3rd

Warm Up: What is Economics? How do you feel about

Economics?

Learning Objectives

SWBAT:

•Identify and explain some basic economic principles

•Apply basic economic principles to the elementary classroom

•Evaluate if teaching students to think like economists will help them make better decisions in their future.

Stolen Lesson

• Junior Achievement

• http://www.ja.org/

Average Citizen on Economics

• Economics is about making money!

• Money is not the focus of economics.

Students on College Economics

• The dismal science

– It’s difficult

– It’s boring

– It’s not relevant to me

Let’s Get Relevant?

• Traditional economics

– College textbooks • Principles of Economics includes:

– every economic concept of last 200 years!

– Taught by lecture, graphs, lots of chalk

Consequence for K-12 Education

• K-12 teachers– often avoid college economics

courses!

• If they do take such a course, – Retain little

• Lack “economic way of thinking” • Lack enthusiasm • Lack ideas on how to teach

economics

How People Learn

John Bransford

• This is a problem …

– “Content knowledge of the teacher is crucial for student learning.”

Our Nation’s Dilemma

• Less than 25% of adults experience a college economics course

• Those who do, unlikely to “internalize” concepts

• Critical need– K-12 economic education for teachers

• deliver economics in schools

Content: What Should It Be?

• We must

– teach students how to think

• The theory of economics does not furnish a body of settled conclusions …

– it is a method rather than a doctrine,

– an apparatus of the mind, which helps its possessor to draw correct conclusions.John Maynard Keynes

1883-1946

Economics Is …

. . . not a body of knowledge,

– but it is a way of thinking

Methodology: How to Teach?

• How do you teach a skill?– Baseball, piano, economics

• Practice!– “Activity-based” learning

• not strict lecture• not memory

• What’s Worth Teaching? Mark Brady– Students retain:

• 20% of what they see and hear• 80% of what they experience

Objectives

• Content– Strengthen background

• A sampler

• Pedagogy:– Experience activities

• Enthusiasm

Would you like a Butterfinger?

• ______ Wants

• 1 Butterfinger

• What is the economic problem?

Scarcity

• Inability to satisfy everyone’s wants

– Multiple uses for each resource

• must choose how/where to use

What Is Scarce?

• Productive Resources:

• natural resources (land)

• human resources (labor)

–entrepreneurship

• man-made resources (capital)

technology

Scarcity Choice

• Economics is:

– the study of choice

Key Concept

• Individuals and societies face tradeoffs

• and must make choices.

Scarcity Choice

In Groups

• Discuss how elementary students experience scarcity.

• How does scarcity in their lives require them to make choices?

The Economic Way of Thinking

• Economists study:

(1) why people choose what they do

(2) consequences of people’s choices– for the individual– for society

(3) if inefficient, how improve the outcome?

Candy Bar Activity

• One Volunteer, please?

• Opportunity lost opportunity cost

– Value of the best foregone alternative

– “Choosing is refusing”

– choose A, refuse B –

» cost of A is value of B

The Dismal Science!

There’s no such thing as a free lunch!

Key Concept

• Choice involves cost

» opportunity cost

Why Do People Save?

• To provide for future needs

• This is the BENEFIT of saving

Every Choice Has a Cost!

• Opportunity cost of saving?

– What you give up to get something

– If save, cannot spend now

• give up present consumption

Economics: a Study of Choice

• In choosing, we weigh:

–BENEFIT of future consumption

versus –COST of less consumption now

B(X) C(X)

Why Do Americans Save So Little?

• C(X): sacrifice immediate gratification

• B(X):– Expected future consumption

• or bequest to children

• For many, the C(X) > B(X) . . . • and the data . . .

Personal Savings Rate

–1

0

2

4

6

8

10

12%

1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

JA Economics for Success

• Instant Gratification is a powerful!

• Consider the results of experiments …

Choosing Fruit vs. Chocolate

TimeChoosing Today Eating Next Week

If you were deciding today,

would you choosefruit or chocolatefor next week?

Patient Choices for the Future

TimeChoosing Today Eating Next Week

Today, subjectstypically choosefruit for next week.

74%choosefruit

Instant Gratification

Time

Choosing and Eating

Simultaneously

If you were deciding today,

would you choosefruit or chocolatefor today?

Time Inconsistent Preferences

Time

Choosing and Eating

Simultaneously

70%choose chocolate

Today, subjectstypically choosechocolate for today.

Impatience: Instant Gratification

Choose among 24 movie videos

• some “low brow” – My Cousin Vinny

• some “high brow” – Schindler’s List

• Picking for tonight:

– 56% of subjects choose low brow.

• Picking for next Thursday:

– 37% choose low brow.

• Picking for second Thursday:

– 29% choose low brow.

Tonight I want sugar-coated entertainment…next week I want things that are good for me.

Consequence of Faulty Discounting

• Average adult –

– $6,000 outstanding credit card debt.

• Few can afford to pay in full,

– so make minimum payment each month

– pay interest at very high rates on balance.

• Immediate gratification is a powerful force!

Since Scarcity Implies Choice

• … and since choice involves cost

Why choose it?

• Assume that:

– People choose X if:

• B(X) > C(X);

–otherwise, not

» where B(X) = benefit of choice X

Play It Again, Sam

• Raise the cost

– if C(X) > B(X), • choose another bar

In Your Group

• Discuss how elementary students make choices based on the costs and benefits.

• Could weighing the costs and benefits of choices help students make better decisions?

• What type of decisions?

Key Concept

• People respond to incentives

Consequences

• People respond to incentives causing

–intended consequences, and

–unintended consequences• can offset the intended benefits

People Respond to Incentives

• Mandated auto protection– seat belts

– air bags

– antilock brakes

• Intended consequence?– “Seat belts save lives!”

Driving Speed

• Benefits of driving fast, B(X)?– Get there faster– Thrill

• Costs of driving fast, C(X)?– Ticket, fine– Accident, injury– Insurance premium

Driving and Snow

• What happens when it snows?– On average, people slow

down.

– Why?• C(X) goes up • for many, C(X) now

exceeds B(X), –people respond to

incentives

Driving & Seat Belts

• What happens when people wear seat belts?– C(X) goes down

• B(X) > C(X) for some• who now drive faster• more accidents

• Unintended consequence?– Seat belts increase

injury!

• Net Benefit?

Consequences

• People respond to incentives

– intended consequences, and

– unintended consequences

The Camel Race

• Two Bedouins met in the desert, and fell into an argument over their camels, each claiming that his was the slowest, “stubbornest,” most useless camel in all of Arabia. The argument ended in a bet. They agreed to race to the oasis, two miles away, whichever camel arrived last would be proved slowest, and his owner would win ten dirham from the other.

Camel Race continued

• . . . They got on their camels, and set off slowly toward the oasis. More slowly, still more slowly. After a while, it became clear that since each Bedouin was trying to win the bet, they were never going to make it to the oasis.

• . . . After a while, a wise sheik rode up on a donkey and asked them why they and their camels were standing still, in the middle of the desert, on a hot day, with the oasis less than two miles away.

The Camel Racecontinued

• They got off their camels, and all three sat down in the shade of a rock while the two Bedouins explained about their bet. The wise sheik whispered two words to them. The Bedouins immediately jumped on the camels and rode off as fast as they could towards the oasis.– What were the two

words? ________ _________

• Switch camels!

Key Concept, Once Again

• People respond to incentives–…and the rest is commentary

» Armchair Economist

–Freakonomics» Steven Levitt

In your groups

• Discuss how students respond to incentives in the classroom.

• What incentives work, what don’t….why?

Concepts Review

Students understand that because of the condition of scarcity, decisions must be made about the use of scarce resources.

– 1.1: scarcity choice cost

– 1.2: people respond to incentives

– 1.3: broadly applied to all people

Economic Systems

• Every country must make these choices:

– What to produce?

– How to produce?

– For whom to produce?

For Whom? Rationing Device or Allocation Mechanisms

• Lottery

• First come

• Market/Price

• Command/Planner

• Force

• Share

• Need

Market Economy or Command Economy?

Two Primary Mechanisms Observed in World?

Let’s vote on the one we want to use for the candy bar.

One Dimension for Classifying Economic Systems

Market Command

United StatesCanadaWestern EuropeAsia (many parts)

Former Soviet blocChinaIndia

Rationing Device

. . . a continuum

Another Dimension for Classifying

• Government (or state) ownership– Socialism

• Private ownership– Capitalism

Ownership of Key Resources

Private

State

SocialismChinaIndiaformer USSR

Ownership

CapitalismUnited StatesWestern Europe

Theory of the Communists may be summed up in a single sentence: Abolition of all private property. The Communist Manifesto, Karl Marx &

Friedrich Engels, 1848

Systems in Two Dimensions

Market Command

Private

State

Market CapitalismUnited StatesWestern Europe

Command Socialismformer Soviet blocChinaIndia

Rationing Device

Ownership

Choices & Tradeoffs

How Much Command? How Much Market?

Market Command

Private

State

. . . a continuum

Choices & Tradeoffs

How Much Public? How Much Private?

Market Command

Private

State

It Depends!

Goals of an Economic System?

• Economic Growth (standard of living)• GDP level & growth rate• Standard of living: health, literacy, life expectancy, etc.

• Economic Equity -- some measure of fairness

• Economic Stability/Security• inflation & unemployment• safety net: social security, welfare

• Economic Freedom -- freedom to buy, work

• Economic Efficiency -- minimize waste

Discuss in your groups….• What do elementary students know about

these economic goals?

• What experiences have they probably had with them?

• Economic Growth

• Economic Equity

• Economic Stability

• Economic Freedom

• Economic Efficiency

Utopian Society

• Divide into Groups– Each group rank order the goals

• rank from – 1 = highest– 5 = lowest

» No ties allowed

– ______ Economic growth– ______ Economic equity – ______ Economic stability/security– ______ Economic freedom– ______ Economic efficiency

Hungarian Teacher Utopia

• Highest Lowest – Growth– Equity– Stability– Freedom– Efficiency

4

0

2

4

4

0

14

0

0

0

From Marx to Markets

• Why are so many countries in transition from command socialism to market capitalism?

– Capitalist market economies tend to have:

• higher economic freedom

• higher economic growth & standard of living

The 75-year Experiment

• . . . collapses in the early 1990s

• Soviet Union breaks up into 15 independent states, and

• Eastern & central European nations become independent of former Soviet bloc

• The 75-year experiment of the Soviet version of command socialism ends

Consequence of Socialism• From each according to his

ability to each according to his need.– Intended Consequence?

• equity

– Unintended Consequence?• transfer income from rich to poor,

– those generating income (water), can’t keep it, so work less

– Those receiving income, receive without work, so work less

• More equity, implies less efficiency– Less total income: “leaky bucket”

Collectives versus Private Farms

90% of Belarus land is a government property. Nevertheless, our private agricultural sector produces more than 50% of entire agricultural output. . . . Svetlana Yurkovskaya, Belarus

A typical dacha near

Sumy, Ukraine

Key Concept

• Markets are generally a good way to organize economic activity

• But why?

Fine Chocolate for Sale

• How many would like this … if giving it away?

• How many are willing to pay:• $0.25?• $0.50?• $1.00?• $2.00?

• Construct “demand schedule” or table with price (P) and quantity (Q)

• Plot demand curve

Price Qd

1.00

0.75

0.50

0.25

0.00

1

3

5

8

12

P

1 3 5 8 12

D

Quantity

1.00

0.75

0.50

0.25

0.00

Are You Willing… • … to be a police person?

– For:• $20,000 per year?• $40,000 per year?• $60,000 per year?• $80,000 per year?• $160,000 per year?• $320,000 per year?

• Construct “supply schedule” – table with price (P) and quantity (Q)

• Plot supply curve• Interpret graph

10.00

7.50

5.00

2.50

8

6

4

2

Price

150

120

90

60

1 3 5 7 9 11 Quantity

SPrice Qs

150

120

90

60

8

6

4

2

Market EquilibriumPrice

S

D

Pe

Qe Quantity

What Markets Do Best?

Transmit information to decision-makers

The central task of economic systems:

rapid adaptation to changes in the particular circumstances of time & place

Transmitting Information

Friedrich von Hayek

Examples of Market transmitting information

• Hurricane in Florida kills crops of oranges...what happens to the price of oranges?

• Wii console drops in price….what is the market telling us?

In your groups

• Discuss what experiences your students have with the market of supply and demand?

• Can they understand it? Why or why not?

Since economics is the study of

choice…

•

The Fish Activity

• Four volunteers

• Rules:– 0 to 15 seconds

• 1 point per Fish

– 15 to 30 seconds• 2 points per Fish

– Person with most gets 1 point bonus

– Game ends when all fish taken.

About the Fish Activity . . .

• Were you surprised with the general outcome?

• Why or why not?

• What did you assume about your colleagues?

The Economic Perspective

• Economics is the study of choice,– assuming that people are:

• rational, and

• self-interested

• This is the predictable element in human behavior,– the fundamental assumption of economics

• economic man

The Fish Activity

• Step 1: Understand choice of people

– B(X) -- your gain if you wait?• 0 points

– C(X) -- cost of waiting • 1 point (per fish you might have

“caught”)

– Net Benefit

• minus 1 point

• Understand or predict by assuming:– self-interested people weigh B(X) vs

C(X)

Market Failure

• Size of the “pie” is smaller than potential

• Society is wasting scarce resources!

• Identify the failure.

The Fish Activity

• What generated the problem in this activity?

• Why did the group fail to achieve the efficient outcome?

If the Problem is Greed . . .

• Possible to eliminate greed?

• Want to eliminate greed?

• Consider:– Can we capitalize

on greed by steering for benefit of others?

Self-Interest or Greed Assumption

• What’s the problem? Why did your airplane not take off?

• Gravity! The problem is gravity.

• What does this have to do with economics?

The Aeronautical Engineer Story . . .

The Blame . . . • Health care:

– “the problem with health care in the U.S. is– greedy insurance companies– greedy hospitals– greedy doctors– greed, greed, greed, that’s what’s to blame!”

• Public Education– “the problem with education in the U.S. is

– lousy administrators– lazy teachers– children who don’t care– and many other ills caused by self-interested people.”

Where to Place the Blame?• Economists assume self interest

– Just as the aero engineer must assume gravity

– We are not ready to suspect any person of being defective in selfishness.

» Adam Smith, 1776

• Economists do NOT blame the people!• Instead, consistently poor outcomes

– result from poor incentives– generated by the underlying structural problem

The Fish Activity Again

• Four volunteers• Rules:

– 0 to 15 seconds• 1 point per fish

– 15 to 30 seconds• 2 points per fish

– Person with most gets 1 point bonus.

– Game ends when all markers gone

– But, define property for each participant.

Steps 1 and 2 for the Pencil Activity

• Step 1: Understand• define X = wait.

– B(X): 1 point• since benefit accrues to you

– C(X): 0.00• since don’t lose your

property

– NB(X): + 1 point• thus, tend to wait.

– Efficiency!• Size of pie is maximized

– Participants:• Acting out of self-interest?

The Cause of Failure• What is the source of the fish failure?

– Lack of well-defined and enforced

private property rights

– To function properly, markets require property rights

• self-interest steered for the benefit of society

• Note: do not say the failure is “self interest”• do not blame the fishermen• do not blame the loggers

The Three-step Process

• Step 3: –Consider Policy

Alternatives

• A potential role for government

Step 3: Government Policy• Policy Option #1:

– Create property rights that are:• well-defined• well enforced, & • marketable.

But this is the essence of Capitalism!

Content Standard 2

• Standard 2: Students understand how different economic systems impact decisions about the use of resources and the production and distribution of goods and services.

– 2.1: Resource allocation in command & market economies

Money, the Economy, and Inflation

What Is Money?

• Are cigarettes money?

• World War II Prisoner of War camps

Functions of Money?

• “Money is what money does”

• measure of value

• store of value

• medium of exchange

Historical Examples

• Cigarettes -- POW camps

• Colored shells – India

• Fishhooks – Eskimos

• Salt – Ethiopia

• Tobacco -- Colonists

A Candy Bar Activity

• Distribute Rodgers • Auction 1 candy bar

• price paid?

• Distribute Rodgers again• Auction 1 candy bar

• price paid?

• Distribute Rodgers again• Auction 1 candy bar

• price paid?

Again…..• Distribute Rodgers • Auction 1 candy bar• price paid?• Distribute Rodgers again• Auction 2 candy bar• price paid?• Distribute Rodgers again• Auction 3 candy bar• price paid?

In Small Groups . . . Discuss

• What happened to the amount of money?

• What did people do with added money?

• What effect did this have on price?

• What would have happened when # of candy bars for sale in round 2 had increased substantially?

• When is increasing the money supply inflationary?

Historical Examples of Hyperinflation

• Germany, Aug 1922 - Nov 1923– Inflation rate (15 months)

• 1,020,000,000,000%

– To feed a couple for a week:• Before 1920

– 20 marks• Early 1923

– 20,000 marks • November 1923

– foot-high stack of 50M mark notes

Germans tell a story . . . • ... two women were carrying a laundry basket filled

with money to the bank. • The women saw a crowd gathered around a shop

window and put down their basket to peer into the window to see if there was anything they might purchase.

• When they turned around a moment later, their money

was in a pile, but the basket was gone.

Key Concept

• Prices rise when governments print too much money.

Worst Inflation on Record

• Hungary, Aug 1945 - Jul 1946:

– 381,000,000,000,000,000,000,000,000,000%

Hyperinflation in Transition Economies

• Russia• Inflation peaked at 2,600% in 1993

– Millions of Russians lost their life savings• entire retirement nest eggs can’t buy lunch at

McDonald’s

Review Concepts

• Scarcity• Costs v. Benefits• People are self interested• People respond to

incentives• Instead of blaming

people, blame the structure of incentives.

• Fix the structure based on thinking like a economist….

• In your groups, apply In your groups, apply these concepts to the these concepts to the following classroom following classroom problems:problems:

• Poor BehaviorPoor Behavior• Low homework Low homework

completion.completion.• Low classroom Low classroom

discussion discussion participation.participation.

PBS

• Positive Behavior Support• School Wide Effort• Determine Expectations…very specifically.• Set up a system of rewards for meeting

expectations.

Think Pair Share: Think like an economist: How can you use this in your classroom? What will make a PBS program successful?

Considering Students are rational and self interested: How will PBS work?

Even if your school doesn’t have PBS, how can you use PBS philosophy in your classroom?

In your groups…

• Discuss how economics could be used in elementary curriculum.

• Brainstorm 10 ways to use economic thinking in your classroom.

• Write down your best 5 and turn in for participation points for today.