Wednesday, January 13, 2010

My Economics Teaching

I have a fairly unique way of teaching my class.  From my syllabus:

You will have a standing homework assignment in this class. You must come into each and every class with a question about economics to ask me. It can be a question about current events, historical events, or material in the textbook.

I spend at least 80% of the class time answering these questions.  It works very well; I have gotten excellent evaluations using this method and I am happy with how much they learn in the process.

I also have a way of ensuring that I always have excellent class notes available for students who are out sick:

If you bring a laptop into class and have it open, you must email me your class notes by 8:00 am the next day.  Failure to do this will result on a loss of your laptop privileges.

You may also earn points from taking notes in class. I will give one point to the person who emails me the best set of notes before 8:00 am of the day after class.

I had six sets of class notes to choose from for the last class.  Most of them were very good.  They give me the additional benefit of seeing how well I am communicating with the class.  If several people get it wrong, that means I did not explain something well.

I have copied the winning set of notes from last class to the end of this post.  It contains economic information of general interest, and also shows how a typical class session goes.  These notes have a few mistakes; I could construct a better record of what I said by adding bits and pieces of good notes that did not win overall, but that would take more time than I feel like spending.

As the year progresses, the questions tend to get more technical, relating to assignments and the textbook, but the first few weeks are always fun:


Class Notes 1/12/10 -

The purpose of the number game we played at the beginning of class was to show students that they should try to disprove their hypotheses rather than find information to agree with them.  By trying to disprove your hypothesis, you learn whether or not it is stable or not.


The book discussed the fact that health insurance should be taken away as a benefit of a job.  Would that backfire for low-income families? 

We live in a market of competitive wages;  a company must pay you on the margin of what you bring in/are worth to the company.  If a company takes away the health insurance benefit, then they would have to make up for that part of your salary by simply increasing your paycheck.  They wouldn't want to do that, and if they didn't then workers wouldn't be paid enough.  After a little while, the workers would realize this and leave to go to another company that would benefit them more.  Also, when your employer chooses the insurance company, you are stuck with that provider, giving you no market power.  If your employer doesn't choose your provider for you and you are left to do so with the extra money they pay you since they don't offer that service, then the employee has the market power by choosing his own insurance company. 


Can you briefly explain what caused the gas crisis last summer?

1.        Supply shock – disruptions to the supply of oil (ex:  the war in Afghanistan)

2.       Demand for gas goes up in the summer because of people traveling, etc. 

·         We would never have a true shortage if the government didn't interfere with the gas prices, because supply and demand would regulate it. 

·         The government tried to set a price limit of $4/gal. on gas, but that caused many problems.  If the service stations had to pay $5 to get the oil and were only allowed to charge $4 for it, then they couldn't make a profit and their business would suffer.  This is what caused the shortage – the government interference. 

·         Political law cannot stop the law of nature


Could the gas price ever really double overnight?

Yes, if supply shock happened all at once (a large battle in Afghanistan, a dust storm in the deserts where the oil rigs are located, etc.).  In the absence of appropriate storage and hedging, yes, this could happen. 


Would legalizing marijuana be good for the economy? 

In my opinion yes, it would satisfy supply and demand.  The law will not stop people from getting marijuana as it is.  Right now if you buy drugs you are financing terrorists in Mexico that are trying to sabotage the U.S. government.  And from a medical standpoint it is on pretty much the same level as cigarettes, and is safer on a driving note than is alcohol. 


From the homework, should economists use their morals or more rely on numbers? 

Regarding the drug question, the same situation was just framed differently, and some reactions were changed by the differences in wording.  This teaches people to escape from framing bias.  Economics teaches people how to strip away framing bias and use number to solve problems. 


Is buying stocks essentially like gambling?

With a single stock yes, because you cannot predict the market's future.  In order to beat everyone, you must be smarter than everyone else and only a few of the top stock market experts are that smart.  A difference is that, in the long-term, an individual usually wins with stocks;  however, with casinos the house, not the individual, typically wins.  Buying several stocks (as in a mutual fund) is safer than buying just one stock because it increases diversification. 


Can you explain the efficient market hypothesis?

The previous answer pretty much explains it.  You can't beat the market unless you are smarter than the market.  To do that you must know something no one else does or just get extremely lucky.  The Challenger incident shows this well;  within an hour the stock for the company that produced the faulty O-ring went down tremendously, while the other companies involved in the making of the space shuttle stayed constant.  This pointed out the company at fault months before the government could accurately identify the guilty party. 


 Which is worse:  inflation or unemployment? 

Ideally you want a little of both in an economy.  You want an equal mix of the two, and this is an example of a trade-off.  When one is significantly higher than the other, you must adjust the two to try to balance them out.  Ideally, inflation will be about 2% and unemployment will be about 5%.

Is it possible to get in trouble by playing the market?

Yes, this is insider trading.  It's illegal to use insider information to get ahead in the stock market.    


If you knew your company was going to tank, how long would you have to wait to get rid of your stocks before it would not be considered insider trading?

Until it went public;  by public I mean a letter to all of the stockholders. 


Are there caps concerning the amount of trading within a company? 

Yes, and this is to monitor the insider trading and to prevent it altogether. 


Isn't insider trading the reason Martha Stewart went to jail?

Yes, that was insider trading. 


Can you explain dividends? 

They are what you get back from an investment;  your share of the yearly profits of a stock;  a known constant stream of payments you receive. 


Is it possible to make your living by just trading stocks all day? 

It is mostly rich, retired people who make their money off of dividends.  Also, the people you see on Wall Street, who obsessively follow the news feed to keep up with the market, make their money from stocks, too.  But even these people don't make more than the average person.  The few that do are very smart and quick. 


What are they all yelling on the floor of the major stock exchange in New York? 

Trading things, like how much one is selling stock for and how much another is willing to buy at.  It's like several different auctions going on all at once. 


When was money first printed in the U.S.? 

Before we were even the U.S.A.  Each of the 13 colonies printed their own money.  Most printed too much and caused huge inflation, which obviously caused many problems.  When the U.S. formed our Constitution she had to back the printed money with the gold standard (gold stored in reserve) to ensure stability.  We quit using the gold standard around the Great Depression. 


So can we just print as much money as we want? 

Yes, but it is backed by our reputation.  Our reputation is actually morally sound.  There are only about 12 countries that are less corrupt than us. 



What happens if an entire country defaults on all its debt? 

All of the money goes from that country.  An example is Argentina.  Argentina defaulted on its debt, and all of the Argentinean savings bonds became worthless. 


Why is Dubai having problems with defaulting? 

Dubai had a property boom, building all kinds of new hotels, and even building an artificial island shaped like a palm tree.  Also, it is located in a fairly corrupt part of the world.  The government helped out some, and Dubai is only partially defaulting. 


Why are credit card interest rates so high (like 18% or 20%) while car and home insurance rates are much lower (like 5%)?

Because of the risk involved.  The credit card has to be able to pay for the people who never pay their money back.  They have to charge that high of an interest rate so they don't lose money from people who default on their credit card payments.  When it comes to car or homeowner's insurance, they have something they can gain if you default.  If you don't pay your car insurance for a few months, the insurance company will simply come and take your car from you.  The same principle stands for homeowner's insurance. 


Are the interest rates we pay related to our credit score? 

Yes, and it's because of your level of trustworthiness.  If you are a young person just starting out, you will be stuck in the lowest category of "trust" because you haven't proven yourself to be responsible.  If you pay of your credit cards on time and constantly have good standing with the company, then you will build a good credit score and, in turn, be eligible for lower interest rates. 

1 comment:

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