VeconLab Microeconomic Principles

  • Production: The Production and Gains from Trade program lets people discover the benefits of trade based on differences in comparative advantage, which can be used in discussion of production possibilities frontiers and opportunity cost. The productivity setup option for that program lets students discover that optimal input allocations are those that equate marginal values, not average values.
  • Supply and Demand: The Call Market program (CM) generates randomly determined buyer values and seller costs. These are arrayed into demand and supply functions, and the competitive equilibrium price and quantities are calculated for you on the Admin Results Menu. The trading mechanism takes submitted bids and asks, and generates "pseudo" demand and supply functions that are crossed to determine a uniform price and a quantity traded at that price. The price determined in this manner becomes the final price when the market is "called" or stopped by you. After each round ends, you have the option of shifting supply or demand, imposing a tax or subsidy on buyers or sellers, imposing a price ceiling or floor, or allowing collusion on one side of the market. The call market is used on many electronic stock exchanges around the world, and call market-like arrangements are used to find opening prices for stock markets like the New York Stock Exchange. The trading on the NYSE floor is more closely approximated by the Double Auction (DA), in which buyers and sellers make bids and asks, and anyone can accept another's proposal at any time. Thus trades occur in a sequence, as indicated by a "ticker tape." Even in a larger class, you may have time to run several rounds of a double auction, followed by several more rounds with a second treatment that involves a shift of supply or demand.

  • Discussion of Supply and Demand: After running a Call Market or a Double Auction, students can be given the actual values and costs, allowing them to construct the actual demand and supply functions and to make price and quantity predictions (which are provided for you on the Aggregate Results pages). Students can also be asked to calculate the total earnings at that price. Then indicate the values and costs of the units that actually traded, and ask them to calculate total earnings and market efficiency (total earnings as a percentage of the maximum total earnings that results from a perfectly competitive outcome). The admin results page also has a link to an automatic graphic display of supply, demand, and the sequence of transactions prices. Concepts covered: demand, supply, consumer surplus, producer surplus, market efficiency, and the necessity of "large-numbers" and perfect-information assumptions in obtaining efficient, competitive outcomes.

  • Monopoly: The Cournot Market Game (CR) contains a monopoly option. You can specify a relatively narrow range of random shocks to the price that is determined mostly by the person's quantity decision. Students who play the game will be able to find a quantity that is close to the optimal monopoly quantity. Afterwards, give them the sequence of the quantity decisions and the associated prices and total revenues for a typical person, and ask them to estimate a straight-line demand curve (with a hand-drawn graph, or perhaps with a regression done on Excel). From this curve, they should be able to graph marginal revenue, and intersect it with the flat marginal cost curve that results from the constant cost setup in the game. Students can compare the actual outcomes with the theoretical monopoly prediction. A discussion of elasticity and sales revenue effects of price changes is probably done best with a second treatment in which there is no randomness in demand. Concepts covered: demand, marginal revenue, marginal cost, monopoly pricing, total revenue, and demand elasticity.

  • Oligopoly Use the Cournot Game (CR) to illustrate the effects of increased competition (higher numbers of sellers) on price, quantity, and total surplus. The incredibly severe nature of price competition can be driven home by running them through the Bertrand game (BR) with more than two sellers per market.

  • Externalities and Zero Long Run Profits: The tendency for free entry to drive profits to zero can be taught using the Market Entry/Congestion Game, where negative externalities due to congestion in one market can be internalized by the imposition of an entry fee.

  • Public Choice: The nature of the free rider problem can be illustrated by the Voluntary Contributions Game. Free riding can be partially remedied in the "punishment point" variation that lets people impose punishments that are costly to both sender and receiver. Alternatively, the inefficiency of some non-market allocations should be emphasized in the discussion of results from the Rent Seeking Game.

  • Prisoner's Dilemma: Simple notions from game theory can be introduced via the Matrix Game or Guessing Game programs.

  • Computer Availability: Since the lectures and discussion sections for a principles class are not typically taught in rooms with computers, see the Hints for Large Classes (for "After-Hours" and Asynchronous Games). Non-computerized versions of selected games are available in the Class Experiments Appendix of Holt(2018) Markets, Games, and Strategic Behavior: A First Course in Experimental Economics.

    Vecon Lab - June 3, 2020