Economics is a denigrated science. But, like it or not, we cannot ignore the subject: it is all around us.
Teaching it will be much more effective if we make that point. We need to demonstrate that what students are learning is not theoretical nonsense but something that is really useful.
A prime example of this is when I teach the monster concepts involved in “theory of the firm”, which used to haunt almost every student I taught. Broadly, there are four market forms: perfect competition (PC), such as open-air markets selling unbranded commodities; monopolistic competition (for example, the market for shoes); oligopoly, which means a small number of firms, each large in size (the market for cola drinks, for instance); and monopoly.
This topic usually requires a lot of diagrams, which can be confusing, but I do something different: we go shopping.
I take the students around town, visiting examples of different market forms to see whether the theory actually applies in the real world. For instance, we visit an open-air fruit and vegetable market. In a PC situation such as this, firms are small and sell unbranded commodities with no differentiating factor, so they cannot charge a premium price.
The class is divided into groups, with each one assigned a separate fruit or vegetable. They have to gather pricing data on their assigned item from the various stalls, to see if there are any price differentials. If yes, the group bargains, and more often than not the seller reduces the price.
If price differentials still exist, students have to note why: it could be down to a difference in quality, and so, strictly speaking, they are not the same products. In addition, stalls situated at the market entrance charge a higher price, taking advantage of their premium location.
Through this, students learn that the PC market model presumes “perfect knowledge” - in other words, that consumers know the price prevailing at all stalls. Of course, that may not be true, therefore no market in the real world is a pure PC market.
Likewise, we visit hypermarkets such as Carrefour and Metro to study the characteristics of oligopolistic markets. We then observe how Google, Microsoft and Apple behave, to ascertain whether they have the characteristics of a monopoly.
“So, how do I apply this when I grow up?” is what students ask me. Well, if you ended up being a producer, I tell them, you would ensure that you are not in a PC market, since there is no pricing power. Brand your product. Exploit its unique attributes so that you can charge a premium price.
However, if you ended up working in government, you would try to get the markets to be as perfect as possible, perhaps by increasing competition, since then they would yield the lowest price, which is great for the consumer. Of course, PC markets may not be good for the consumer in all cases, so I also discuss these exceptional cases with my students.
Back in class, each group is asked to give a presentation on their experience and the extent to which they found the theory of the firm to be true in the real world.
This lesson breaks down a complicated theory and enthuses students about a subject that they may previously have written off as boring.
Gautam Khandelwal teaches economics in Rajasthan, India
