Active Learning Instruments for Teaching Under-graduate Economics Concepts

Full author list: Helen Dabb, Mary Hedges, Maureen Janett, and Geoff Perry from Faculty of Business, Auckland University of Technology, New Zealand and Alina Zapalska and Dallas Brozik from Division of Finance and Economics, Marshall University

This case study presents four active learning techniques that can be used to supplement the economics lecture. It is generally agreed that traditional patterns of instruction may not be sufficient in helping students learn how to think critically and develop good interpersonal skills. Undergraduate instruction in economics has been largely a passive experience. Currently, instructors are more frequently applying active and collaborative learning techniques to help students learn to work and think through problems together.

We have used this classroom experiments in our teaching practice to improve effectiveness in undergraduate economics courses. The first experiment illustrates a kinaesthetic approach to teaching the concept of diminishing returns with the use of tennis balls and buckets. This experiment can also be extended to aid the teaching of production, costs and growth. The second experiment presents an activity that allows students to understand why oligopolies are likely to collaborate or form a cartel. Experiment three demonstrates changes in money supply. Experiment four is used to let students participate in a game that simulates an auction in which players bid for raw materials to create menus that can be sold to generate a profit. This single-period game illustrates the complexities of decision making in dynamic environment.

Active group involvement in the experiments is one key to stimulating critical thinking. The authors hope that some of the techniques and lessons presented will be adopted to suit personal style and course objectives to create positive outcomes in the classroom.

Experiment #1: Teaching the Concept of Diminishing Marginal Returns Using a Hands-on Focus

As of June 2004, this section has been superseded by a fuller case study entitled "Tennis Balls in Economics".

Experiment #2: Why Are Oligopolies Likely to Collaborate or Form a Cartel?

The second experiment is a simulation where the students have to “agree” on their favorite television program. The game runs in two cycles. The first cycle is representative of a market situation where there are many sellers, a case of perfect competition or monopolistic competition. The second cycle is representative of an oligopoly.

The game begins by each member of the class naming his/her favourite television program. Either a student or the teacher can act as scribe and write these programs up on a board as they are named. Each time a program is repeated the scribe can signal this with a tick next to the initial listing. The number of people who provide this information is dependent on class size and time available. A minimum of 20-25 students to run the experiment is required so the enough information is provided. This process usually generates a list of about 10-12 programs.

Stage two of cycle one then involves individual students negotiating in an attempt to reduce the number of programs on the list. For example, one member may have two close favourites (South park and The Simpson’s) and be quite happy to give up his first choice and vote for his/her second choice. No more than about 5 minutes should be allowed for this negotiation process. In most cases this will only reduce the initial list by 2-3 programs.

While retaining the results from cycle one it is now time to start the second cycle of the experiment. The students are put into groups of approximately three to four, based solely on their seating proximity to one another. There should be at least one group of two and one group of four students for variety. Each group now has to decide on its “single” favourite television program. No more than five minutes should be allowed for the groups to make their choices. Each group now provides its choice to the scribe. The results are summarized in the same way as in cycle one. The second stage of this cycle then runs the same way as cycle one but with the groups as the unit of negotiation rather than individuals.

Results

The negotiation process of cycle one usually only slightly reduces the number of favorite programs listed. It is more important to focus on how entrenched and defensive the students become of their own choices rather than on the actual decisions made.

Cycle two, stage one will usually generate a shorter list than the final list of cycle one. The cycle two list is usually further reduced through the negotiation process. Discussion on why this has happened enables the students to identify important issues about market structures. The number of people negotiating (market structure) has a critical impact on how players approach the negotiation and the subsequent results. While it is rare to end up with a single program on the final list of cycle two, the very fact that the small groups could decide on any program highlights why oligopolies can often agree.

Extensions

Discussion can be extended into the types of agreements the groups are likely to make and the incentives required keeping them. The students will often raise the issue of repeated games and the trade-offs that they are prepared to make in this time period if there is an expectation of a reciprocal agreement in a subsequent time period. This provides a useful introduction to repeated games in game theory.

Experiment #3: Learning Activities to Assist Understanding of Changes in the Money Supply

This activity gives students an understanding of the causes of changes in the money supply in an economy. The activity is divided into two parts:

1. the primary change in the money supply where students identify the players and activities in an economy that causes a primary change in the money supply and those that does not.
2. the secondary change in the money supply that follows the primary change. The aim of this activity is to show the process of the credit multiplier that occurs when this new money ($200) flows into the banking system.

Primary change in the money supply

1. The class is divided into groups of five players. Each person in the group takes one of the roles listed below.
   • Central Bank also includes the tax department, which collects tax for the Government. The tax is credited to the Government account at the Central Bank.
   • Construction Firm
   • Supermarket
   • Construction employees
   • Supermarket employees
2. A “Central Bank” labelled large box, into or out of which money flows, represents the Central Bank. The Central Bank has a supply of money = $1,000. This money is in notes of $10 x 50, $50 x 8 and $100 x 1 printed in different colours. The Central Bank is the only holder of money ($1,000). Other players have no money at the beginning of this activity. Interaction of the Government and its agencies with members of the public cause money to flow into or out of the Central Bank.
3. The tutor, who starts the activity, plays the role of Government.
4. A series of situations is set out on a worksheet, which is given to students. Figure 2 presents the Worksheet #1 (Appendix 1). For each situation:
   1. the relevant players exchange money as the activity is described;
   2. each student records on the worksheet the primary change in the money supply and the amount of the change,
   3. at the end of the exercise students complete the diagrammatic summary to illustrate the movement of money into and out of the Central Bank and the effect on the primary change in the money supply.

At the end of this activity, students should be able to discover that:

1. there is a primary increase of $200 in the money supply;
2. students should discover that primary changes in the money supply occur as a result of actions of the Government, its agencies and the Central Bank; and
3. monetary transactions between different members of the public do not cause a primary change in the money supply

Secondary change in the money supply

Assumptions made are:

• There is one Registered Bank (RB);
• There are no withdrawals from the money flow i.e. all money loaned by the RB is returned to it as deposits;
• The RB always returns to a fully loaned up position;
• There is no change in a required reserve ratio.

1. This is an individual exercise. Four worksheets, each with a required reserve ratio (R) for the RB, are handed out to students at random. Figure 3 presents Worksheet #2 (Appendix 1). Each student receives one worksheet, which is likely to be different from his/her neighbor. The required reserve ratios used are R= 0.1, R = 0.2, R = 0.25 and R = 0.5. The worksheet is divided into three columns – deposit, loan, and reserves.
2. Students use the prudential ratio given and the primary change ($200 increase) in the money supply to calculate the step by step process of the secondary increase in the money supply as the registered bank lends money to the public. Each step is entered on the worksheet by the student when he/she fills in details in the three columns provided – deposit, loan and reserves. At the end of this exercise, each column on the worksheet is totaled.
3. Students are asked to calculate the credit multiplier from the required reserve ratio provided and the primary change, the secondary change, and the total change in the money supply. Students enter the totals in the spaces provided on the worksheet. To make a comparison of the two totals of each column (deposit, loan, and reserves) on the worksheet provided.

1. Students compare results of the different required reserve ratios on the secondary change in the money supply. The smaller the prudential ratio the larger the effect on the secondary increases in the money supply and vice versa.
2. Students discuss the implications of the resulting secondary changes in the money supply on the economy – effects on interest rates, inflation, GDP.

Extension Exercises

1. Students construct a balance sheet of the RB to illustrate the changes that have taken place as a result of the injection of new money into the banking system under the different required reserve ratios.
2. Students discuss the implications of the resulting secondary changes in the money supply on exchange rates given perfect capital mobility.

Experiment #4: The Auction Market

This experiment is a single-period simulation that provides students the opportunity to plan and implement a strategy in a competitive environment. The game includes an auction in which players bid for raw materials. This auction can result in players making technical changes to planned strategies in response to conditions created by the auction. After the players have obtained their necessary raw materials, they create meal menus that are the source of company profits. Thus, the game has an active component that helps students become involved and gives the game sufficient educational richness.

The game begins by distributing the instruction sheet that provides students with the information they need to plan an overall strategy. This sheet is presented in Figure 4. The winner of the game is that player who receives the highest profit. Players can choose to offer only low, only medium, or only high priced meals, or a combination of low, medium, and high priced meals. Students do not know the optimum strategy at this time since the interactions of the players in the auction will establish each menu's relative profitability. The dynamic game aspect requires players to modify their strategies to meet evolving market conditions.

Figure 4: Instruction sheet

MEAL	CALORIE COUNTER	MODERATE MEAL	WAIST WASTER
PRICE	$10	$20	$30
Salad		(1) Vegetable	(1) Vegetable
Entrée	(1) Meat (1) Vegetable (1) Bread/Pasta	(1) Meat (1) Vegetable (1) Bread/Pasta	(2) Meat (1) Vegetable (1) Bread/Pasta
Dessert		(1) Sweet	(1) Sweet (1) Fruit
Beverage	(1) Beverage	(1) Beverage	(1) Beverage

Players are asked to examine the structure of the menu and determine which menu they will offer. They are instructed that the food will be offered at auction, and they will be biding against other restaurants. Each food will be offered several times during the auction. Players have a budget of $2,500. If a player purchases $2,500 worth of food, he/she runs out of money and must stop biding.

The optimal number of players is five or six. Large classes can be broken up into teams with each team developing its own strategy. There should be only one designated bidder on each team. The instructor conducts an auction using a Bid Sheet that is illustrated in Figure 5.

Figure 5: Auction Bid Sheet

ITEM	QUANTITY	BIDDER	PRICE
BREAD/PASTA	100
VEGETABLE	100
MEAT	100
SWEET	100
VEGETABLE	100
BEVERAGE	100
MEAT	100
BREAD/PASTA	100
VEGETABLE	100
BEVERAGE	100
MEAT	100
SWEET	100
VEGETABLE	100
BREAD/PASTA	100
FRUIT	100
MEAT	100
BEVERAGE	100
VEGETABLE	100

The length of the auction should be about 30 minutes or until each restaurant team runs out of money. The prices established by the biding can have the effect of changing the players' previously established plans, and the players will have to adjust rapidly. The minimum bid can be set at a minimum of $50 or $100 per lots of goods to prevent excessive profiteering.

After the auction is closed, the players are asked to use the food they purchased to construct the combination of meals that will make them the most money. They are also informed that they can sell all complete meals at the price indicated. Meals may come from one or more than one of the menus. Food that cannot be used in preparing a meal is considered waste that cannot be resold or transferred to another restaurant. Then, the players are asked to calculate the value of the meals that they sold, and their total profit. The restaurant with the highest total profit wins.

After the game is concluded and the winner is found, a debriefing session can be held to review lessons learned from the game. The lessons learned are in the area of auction, planning and allocation process. Many students have never experienced an auction, so time can be used to examine the nature of a competitive market environment. Debriefing should indicate how the dynamic nature of the market could cause players to change their initial strategic plans. The allocation process can be explored through the use of mathematical programming to find the optimal solutions. The instructor can illustrate the sensitivity of optimization to the mix of inputs and further illustrate the integrated nature of all market processes on the success of the firm.

The Restaurant Game helps students learn to acquire information through listening and observation and allows them to practice skills of organizing and evaluating information. The game is used with the purpose of providing classroom instruction with a dynamic exercise that can be used to demonstrate multiple aspects of economic activity.

Conclusion

This case study presents four active learning techniques that can be used for improving teaching effectiveness in the economics classroom. These activities prompt students into critical thinking, active and effective information gathering, organizing, analyzing, summarizing, and evaluating. These activities eliminate memorization and repetition, give students opportunities to interact with each other, to question and try out new approaches, and to explain their own ideas while learning. Through active learning, students are pushed to analyze what they have learned, and to discuss and clarify their own reasoning. Working in groups gives students a chance to interact with each other about concepts, verbalize these concepts, and create an argument for discussion.

An effective instructor can use widely different techniques and strategies, and modify and improve these processes with careful and continuing consideration. By giving students opportunities to use their knowledge, make decisions, solve problems, and create new knowledge via active learning, critical thinking processes can emerge.

We hope these instruments will be successfully integrated into the classroom creating positive teaching outcomes. Students who actively work together will be able to effectively apply new information, select what is important, think critically, and learn to make inferences beyond the information provided.

References

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Appendix (worksheets) (Doc format) | (RTF format)

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