Three AEs: Working with the Perfectly Competitive (S-D) Model

These applications are appropriate for use in relatively rigorous microeconomic principles classes at the end of the unit on competitive market and firm analysis. The activities can easily be modified for use in a less rigorous course simply by excluding the firm-level analysis from the applications. Students should have read and taken RAP quizzes on readings for the competitive markets unit. This unit follows the unit on firm production and costs in most textbooks. There are no limits on the class size in which these activities could be used to good effect, though the gallery walk reporting presents minor logistical challenges in very large classes. The pair of activities will take approximately 75 minutes of class time.

Overview

These three activities are based on a New York Times article that reports on events in the world butter market, with a focus on events in France, where some butter prices are not allowed to adjust quickly and shortages result. The first activity leads students to master the basics of short-run competitive market and firm analysis. The second one requires students to examine the distortions that result when prices are not allowed to change quickly in response to market events. The analysis in the second exercise is similar to that for the case of a price ceiling, which students will likely have seen in their reading before class and in the RAP quizzes. The third asks students to consider various policy measures and provides an opportunity to engage the entire group while addressing student misconceptions about the role of government in a market economy.

Expected Student Learning Outcomes

Upon successful completion of these learning activities, students will be able to ...
* Analyze events in competitive markets at both the aggregate market and the firm level by means of the appropriate economic framework.
* Use the economic framework of analysis for competitive markets to predict what will happen if prices are not allowed to adjust to market events.

* Argue in favor and against proposed government policy actions to address price volatility in markets.

Information Given to Students

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Working with the supply-demand model I

Consider the New York Times article "France, land of croissants, finds butter vanishing from shelves."

As a team, discuss the short-run analysis of the events described in the article. Assume the butter market is perfectly competitive.

Use the appropriate economic framework to analyze graphically the events described in the article for both the world butter market and an individual butter producer. (Each student should have both graphs in their notes.) Teams should use one 8.5" by 11" sheet for the market analysis and another for the firm analysis.

Gallery walk reporting.
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Working with the supply-demand model II

Consider the New York Times article "France, land of croissants, finds butter vanishing from shelves."

Why is there no butter on the shelves in many French grocery stores?

Answer this question by means the appropriate economic graphical analysis of a French butter market that includes a separate graph depicting the situation for an individual French butter producer. (Important: Use a different pair of graphs than the ones you used for the previous activity.)

Gallery walk reporting.
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Consider the New York Times article "France, land of croissants, finds butter vanishing from shelves."

What policy measure would best address the butter shortage in France?

1. Allow butter prices to fluctuate freely as market conditions change.
   
2. Allow butter prices to fluctuate somewhat as market conditions change but limit price increases or decreases to no more than 10% within any 30-day period.
   
3. Subsidize butter producers to increase output.
   
4. Require French butter producers to sell to French markets rather than seeking a higher price in neighboring country markets.
   

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Students should read the article before class. I find it useful to have students answer a set of JITT questions on the class CMS before class both to make students accountable for the reading (RAP quizzes for the unit will have already happened) and to prepare students to think more deeply about the case in class.

These activities should come toward the end of the unit on competitive market analysis and should not require much in the way of prefatory comments. One might demonstrate event analysis using the competitive market firm/market analysis beforehand. I do this by screencast beforehand rather than using class time for this purpose. One could require students to watch the screencast as well as read the article and answer the JITT questions. I'd be careful to analyze a different market event than one of the ones at the center of these activities. (In the event analysis for the first exercise, there is a demand increase AND a variable cost increase.)

Mastering this framework is one of the most difficult things students have to do in a micro principles course and I would give the teams plenty of time for the attempt. In my wanderings among the teams while they work, if teams are stuck, I make sure that they have begun the analysis by mapping an initial long-run equilibrium and then I ask them what would change due to the events described in the article. There are two different events. You might suggest that teams should model the butter production issues described in the article as an increase in firms' variable costs of producing butter. Don't give them any more than that or the learning from the activity is compromised.

In the debrief, plenty of teams will have gotten it wrong. Some should have it mostly right, though. I'd have a couple erroneous reports go first then have a reporter from a team with the correct analysis follow. One could then ask one of the reporters from a team that has not yet presented to explain which of the reported answers seems best. Let the discussion play out a bit before moving to summary remarks.

After the short-run analysis is nailed down, ask yet another reporter to predict what will happen in the long run in the market. Have yet another add the formal analysis to the correct short-run graphs.

In summary remarks, it is important to demonstrate the correct answer. I find it extremely important to use three colors for these demos. Four if there are two events under analysis. One color for the base case, one (or two) for the short-run event analysis, and one for the long-run analysis. Get the notation right, too, of course. In my experience, the notation alone is insufficient to get most students to grasp what is going on each step of the way. Of course, the summary remarks can be made via screencast, though it is important that the remarks be posted as soon after the end of class as possible.

The sticky price case results from the fact that in some French districts butter prices are negotiated in advance for the year and not allowed to vary with market events; hence, the shortages. These two cases in juxtaposition are very useful both to convey how price adjusts to clear markets and how distortions result when prices are not allowed to adjust quickly.

I recommend reinforcing these skills with one or several questions on problem sets.

Answer to First AE

Answer to second AE

The policy question to culminate the series exposes many student misconceptions about the role of government in a market economy.

I always have one of these problems both on the end-of-unit assessment and on the final. I find that A students will get this question right fairly easily but B students will make some small errors. This type of problem will generally be out of range for struggling students.

Link to New York Times article.