Driverless New World: How the Market Adjusts to Equilibrium

This is mainly aimed at principles of microeconomics. Given the importance of equilibrium (or absence of it), this could be prime material for review in other more advanced courses at the beginning (including anyone out there who does disequilibrium economics!). Students should have done an iRAT/tRAT on supply and demand concepts after introductory reading/videos/other introductory text on technological change, costs and the effect on supply, demand, and prices. This should take perhaps 20-30 minutes.

Overview

Students are to imagine themselves as consultants to the trucking or other transportation industry and discuss the effect of new technology (driverless vehicles). Key is the adjustment to a new equilibrium, more than the new equilibrium itself. Price and quantity movements are central. A randomly selected team reporter will be called upon to defend the decision from among given alternatives.

Expected Student Learning Outcomes

Students will gain appreciation of the adjustment to equilibrium. Students can sometimes get the impression that markets move from one to another equilibrium quickly or don't appreciate the adjustment process. Students need to appreciate that the process is the outcome of thousands or millions of human made decisions. Students need to appreciate equilibrium as a consequence of forces moving prices and quantities in a certain direction.

Students will come to understand the movement of prices and quantities as a result of new technology that shifts the supply curve. Students will come to understand the adjustment process and the forces that push the market away from one equilibrium and toward another.

Information Given to Students

Student Handout for Driverless New World (Microsoft Word 2007 (.docx) 13kB Jul10 18)

This will require a short video on equilibrium and adjustment made by the instructor or found elsewhere before this problem is given. Books are often inadequate. I resist using terms such as "balance" for equilibrium, since that is vague for students, or may suggest over-reliance on natural/physical models. A huge theme I harp on is that economic outcomes result from human decisions and actions, and use of physical analogies can obscure the true dynamics of a market.

The choices above ask the students for the "least likely result," that may prompt them to think hard. This is flexible: the instructor may want to change this to "most likely" and change the answers slightly to fit.

This may seem redundant, but here is what I do: I draw a "seesaw" or teeter-totter with unequal weights on the board to demonstrate that a larger object (equal distance from fulcrum) could be on the ground but be at equilibrium. Is that balanced? I don't know, ask a physicist. Maybe it is a balance of forces. Key for economics is that when there are no forces leading to change, the system is in equilibrium. When out of equilibrium, forces lead the system toward it. (Reduce the weight on the heavy side and a new equilibrium may result, e.g. if the weights on both sides are made equal). Then I go through a price above or below equilibrium on a supply/demand diagram and ask what happens.

This could be done in a video. Here the challenge is for students to think through the adjustment process. You may need to introduce this problem by emphasizing they are required to think carefully about that process, not simply the final equilibrium. Tell them that the book may have breezed through this, but you cannot for this problem. My experience is that novices to economics really need this, and are amply rewarded by their understanding later once they get it.

It will require some careful thinking and expression for them to concentrate on the "least likely" outcome.

Re the answers: It appears that one can rule out d, since that seems the mostly likely outcome after some adjustment period. The order of choices will probably be a, c and perhaps b, although the last one seems somewhat more likely than a and c since the time period is short. The main discussion is probably going to be among teams choosing a and c; this will allow a discussion of the time element and some thoughts about the entire adjustment process.

In the summing up section, one will want to go through the emergence of excess supply, how that puts pressure on prices, and how the competitive process can generate price and quantity movements -- in this case toward lower prices and greater quantities over time. One can also use the opportunity to point out that the models used in economics often provide approximations. Despite the absence of a completely stable equilibrium, the pressures in that direction help us understand how prices and quantities are determined.

Graded problems in the module and test questions on an end-of-module test