The Economy 2.0: Microeconomics — teaching guides

Complete teaching guides for units 1–10 of The Economy 2.0: Microeconomics, plus the list of building blocks. This page is structured for machine reading.

How this page is organised

• Each unit guide is an H2 section titled “Unit N teaching guide”.
• Within a unit: Conceptual prerequisites, Building blocks in this unit, an H3 Unit narrative, and an H3 What’s important/difficult and how to teach it.
• Inside that last section, each topic is an H4 (“Topic N: …”) followed by the sections it covers.
• Each topic contains one or more Key concept: entries, each followed by a numbered list of activities.
• Each activity carries three labelled fields: Activity type:, Activity description: and Using AI for this activity: (“None” where the guide gives no AI suggestion).

Building blocks

The Economy 2.0 – Microeconomics contains a new feature called “building blocks”. These are self-contained sections or groups of sections that explain certain concepts and techniques. Where building blocks are used in later units, a hyperlink is always provided there which opens the required material in a separate tab, making it easy for students to read the prerequisite material, either to provide the necessary background knowledge when the unit it comes from has not previously been covered, or to refresh their memories. Building blocks are designed to provide instructors with greater flexibility in the way the course is structured, because prerequisite knowledge is easily identifiable.

Prerequisite units

The use of building blocks in The Economy 2.0 – Microeconomics makes it easier for instructors to customize the structure of their class to suit their specific audience and context. There are only two cases where a whole unit is required as a prerequisite for another unit. These units are as follows:

Building blocks by unit

Unit 1 teaching guide

Conceptual prerequisites:

• None

Building blocks in this unit:

• 1.6 Production functions and diminishing average product of labour
• 1.8 Capitalist institutions

Unit narrative

• Technological change
  (Section 1.5)
  Industrial revolution
• Capitalism
  Capitalist institutions (Section 1.8)
  Causation and natural experiments (Section 1.10)
  Varieties of capitalism (Section 1.12)
• The hockey stick diagram
  (Section 1.2)
  GDP
  Living standards over time
  And in different countries
• Global income inequality
  (Section 1.4)
  Poverty
  Skyscraper diagram
• The flat part of the hockey stick
  (Sections 1.6 and 1.7)
  Production functions
  Diminishing average product of labour
  The Malthusian trap
• Climate change hockey stick
  (Section 1.3)
  Atmospheric CO2
  Global temperatures
• Structural transformation
  (Section 1.9)
  Agriculture, manufacturing, services
• Colonialism
  British colonialism of India (Section 1.11)
• The economy and the biosphere
  (Section 1.13)
  Modelling interactions

What’s important/difficult and how to teach it

Unit overview: For many students, this unit will be the first material they encounter in an economics course. It takes a big picture view, examining per capita GDP around the world and over a long period of time. The unifying concept is the “hockey stick” diagram (Figure 1.1).
Units 1 and 2 should be considered together, as unit 1 introduces several threads that are tied together in unit 2 (which introduces models that help explain why the Industrial Revolution took place when and where it did).

Topic 1: data on changes over time

Section 1.2 – the hockey stick, changes in GDP. Section 1.3 – changes in CO2 and global temperatures. Section 1.4 – Global income inequality since 1980.

Key concept: GDP

A short introduction to GDP is provided here, while the macroeconomics volume of The Economy goes into more detail. The relationship between per capita GDP and living standards is discussed in the extension to this section, but it is optional and not required to understand the rest of this unit

1. Activity type: Poll
   Activity description: Most pressing problem poll – Use audience response software to ask your students ‘what is the most pressing problem economists should address?’ and create a word cloud. This provides a starting point to show students some of CORE’s main topics and link to the historical hockey stick graphs from Unit 1. You can also access word clouds for other universities/years on the CORE Econ website.
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Facts – Lead a discussion around the video ‘Why Economics needs Facts’. Suggested questions: Where do facts come from? How do facts help economists? What is a correlation? What is a hypothesis? Why do we formulate hypotheses about correlations? Is there anything that Piketty or Heckman are missing?
   Using AI for this activity: None
3. Activity type: Data
   Activity description: Working with data visualizations – CORE Econ’s data visualizations for wealth and income are a great tool – available at https://www.core-econ.org/visualizations/ Students can construct their own “skyscraper” diagrams and compare countries according to some measures of inequality. The interface guides students through step by step while also providing flexibility so that students can explore different countries according to their interests.
   Using AI for this activity: None
4. Activity type: Data
   Activity description: Working with data visualizations – Ask students to visit the OWiD website and add countries they are interested in to the hockey stick diagram (https://tinyco.re/3290463). Ask them to describe the trends they observe for these countries (such as levels of income, when the hockey-stick growth began, etc.) and compare them to the trends for the default countries shown in the chart.
   Using AI for this activity: None
5. Activity type: Discussion
   Activity description: Interpreting graphs / Think-pair-share activity – Ask students to identify all the elements of a graph that they need to look at in order to understand the “story” that the graph is telling (title, y-axis title and values, x-axis title and values, key). Then show them the hockey stick graph (or later also the climate hockey stick graphs). Ask them to form pairs and describe to each other what the graph is showing. They can share their interpretation with the class. Two helpful questions are: What do you notice? What do you wonder?
   Using AI for this activity: Students use an AI assistant to learn how to create and interpret engaging graphs, focusing on the essential elements that make a graph informative and visually appealing.
   Example Prompts:
   • First Prompt:
     “Create a catchy graph that shows the relationship between daily screen time and sleep quality among teenagers.”
   • Second Prompt:
     “Explain what makes this graph engaging and effective in telling the story of the data. Discuss aspects like color choices, type of graph used, clarity of labels, and any visual highlights of trends or patterns.”
   Students compare the AI-generated graphs and explanations to understand how different elements contribute to making a graph informative and captivating. They learn to identify all the components needed to interpret graphs effectively and discuss how presentation choices can enhance the communication of data.
6. Activity type: Data
   Activity description: Data – Project 4 of Doing Economics (https://www.core-econ.org/doing-economics/book/text/04-01.html) gets students to look at GDP data and consider how well GDP measures wellbeing. The project has 2 parts: part 1 uses GDP data, part 2 discusses the Human Development Index as an alternative measurement of wellbeing. (Each part would be 1 week’s worth of work so instructors can pick/choose questions to set).
   Using AI for this activity: None
7. Activity type: Discussion
   Activity description: Temperatures over the long run – Why do you think we observe a correlation between economic growth and the use of natural resources? Propose a hypothesis.
   Using AI for this activity: Students use an AI assistant to create visual art that represents the correlation between economic growth and natural resource use over time. They analyse the AI-generated artwork to understand and discuss why this correlation exists.
   Example Prompt:
   “Create a piece of art showing the relationship between global economic growth (GDP) and natural resource consumption from 1900 to 2020.”

Topic 2: Explaining the hockey stick

(Section 1.5 – Technological change; Sections 1.6 and 1.7 – Flat part of the hockey stick; Section 1.8 – Capitalist institutions)

Key concept: Production function

this will be an important concept in later units so it is important to cover it here

1. Activity type: Poll
   Activity description: Value of technology – Innovation and technological progress play an important role in explaining the hockey stick chart. This 2019 paper in PNAS (https://www.pnas.org/doi/10.1073/pnas.1815663116) asked people how much they’d be willing to pay to give up modern technology for a year (see Figure 2 which has a lot of interesting examples). Instructors could run a similar poll. Alternatively, the two polls below could be used to help students think about how they value technological innovations, in particular Google. Display the aggregated results for the polls to discuss the importance of technology in our lives.
   1) Think about how valuable you find Google: Would you prefer to keep access to Google or go without access to Google for one month and get paid $80?
   • Keep access to Google
   • Give up Google and get paid $80
   2) Now, would you prefer to keep access to Google or go without access to Google for 1 month and get paid $160?
   • Keep access to Google
   • Give up Google and get paid $160
   Using AI for this activity: Students use an AI assistant to understand how technological advancements impact productivity and economic growth.
   Example Prompts:
   • First Prompt:
     “As a farmer before modern machinery, describe how you plant and harvest crops.”
   • Second Prompt:
     “As a modern farmer using advanced machinery, describe how you plant and harvest crops.”
   Students compare the AI-generated narratives to see how technology increases productivity and contributes to economic growth, relating it to the hockey stick pattern.

Key concept: Average product of labour

students need to understand that the slope of a ray from the origin to a point on the production function shows the average product of labour for that quantity of labour input. They will also need to recognize that as these rays get flatter, moving further to the right along the production function (higher levels of labour input), this demonstrates diminishing average product of labour

1. Activity type: Game
   Activity description: Paper airplanes game to teach diminishing APL – Instructors can give students a set number of materials for making (origami) paper planes and see how the average number of planes changes depending on how many students are working at the same time (the idea being that with finite resources, there will come a point where the extra student doesn’t help so production levels off). More detailed instructions can be found here: https://www.core-econ.org/experiencing-economics/instructors/book/text/50-01-other-experiments.html#paper-aeroplane-production
   For an alternative using tennis balls, see: https://www.economicsnetwork.ac.uk/themes/games/tennis%20balls
   Using AI for this activity: None
2. Activity type: Game (online)
   Activity description: Diminishing APL game – online alternative: Students could simulate data entry in an excel sheet. Starting with one student (worker), data read from a picture/pdf needs to be transferred into fields in a spreadsheet in a given time. The number of students is then increased round by round and production measured by the number of fields completed in the spreadsheet. Technology shocks can be simulated by first not allowing students to use their microphones, and then enabling them.
   Using AI for this activity: None

Key concept: Equilibrium

the Malthusian model demonstrates this important concept. Equilibrium is defined here as a situation or model outcome that is self-perpetuating. If the outcome is reached, it does not change unless an external force acts on it.

1. Activity type: Discussion
   Activity description: Equilibrium – Ask students how people use the term equilibrium in daily life and to think of examples. When is a Newton’s cradle in equilibrium? Link this discussion to the definition in the text. This exercise could be structured as a think-pair-share where students first think for themselves, then discuss with a partner, and finally some students share their thoughts with the class.
   Using AI for this activity: Students use an AI assistant to learn about equilibrium in different contexts.
   Example Prompts:
   • First Prompt:
     “Describe equilibrium using the example of a balance scale with equal weights on both sides.”
   • Second Prompt:
     “Explain equilibrium in a predator-prey ecosystem”
   Students compare the explanations to understand the concept of equilibrium in physical and economic systems.

Key concept: Capitalist institutions

private property, firms, markets. Although many students are likely to be familiar with these terms, it is important for them to have a precise definition in mind in order to understand the connections described in this unit.

1. Activity type: Exercise
   Activity description: Newspaper articles – Look for recent newspaper articles that use the term ‘capitalism’ and discuss how this term is being used. Instructors could ask students to evaluate the usage of the term according to CORE’s definition (private property, markets, firms) – which aspects does the article refer/not refer to? It may also be interesting for students to record the authors perspective on capitalism, is it positive, negative, mixed or neutral?
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Private property – Give an example of something that is NOT private property in your country. Explain why your example is not private property. Concretely, which part(s) of the definition of private property in the text does your example not satisfy? (Students can think about it and discuss with a partner near them (or in a breakout room), and then share their ideas with the class)
   Using AI for this activity: None

Topic 3: Further important considerations

(Section 1.9 – Structural change, section 1.10 – causation and natural experiments, section 1.11 – British colonization of India, Section 1.12 – Varieties of capitalism, section 1.13 – The economy and the biosphere)
Inequality and environmental considerations are two themes that run throughout The Economy. Instructors who want to emphasize inequality could spend more time on sections 1.11 and 1.12, and those who want to emphasize environmental considerations could spend more time on section 1.13. Section 1.10 introduces empirical methods, another theme which runs throughout the text, especially in the “How economists learn from facts” features.

Key concept: Structural transformation

this section highlights the dramatic changes in the share of employment in agriculture, manufacturing and service industries, as well as the share of total output represented by these sectors.

1. Activity type: Exercise
   Activity description: Share of agriculture in total employment – Students can use the graph at this link to explore the share of agriculture in total employment for additional countries: https://ourworldindata.org/grapher/share-of-agriculture-in-total-employment
   Using AI for this activity: None

Key concept: Correlation versus causation

The distinction between correlation and causation is crucial in examining economic data. Because CORE has an empirical focus, it is important to discuss this distinction at an early stage.

1. Activity type: Discussion
   Activity description: Formulating hypotheses about correlation / causation – Ask students to provide examples where two variables may be correlated, without one necessarily causing the other (e.g. spurious correlation – Tyler Vigen’s spurious correlation website gives some funny examples: https://www.tylervigen.com/spurious-correlations). Contrast this to cases where they believe that a clear causal relationship exists.
   Using AI for this activity: Students use an AI assistant to see how the same data can be interpreted differently. They compare the AI’s responses to understand why it’s important to distinguish between correlation and causation.
   Example Prompts:
   • First Prompt:
     “As a journalist eager to grab attention, write a short article (100 words) claiming that eating ice cream causes shark attacks, based on data showing both increase in summer.”
   • Second Prompt:
     “As a scientist explaining the data, write a short paragraph (100 words) about how eating ice cream and shark attacks increase in summer, but one does not cause the other.”
2. Activity type: Exercise (asynchronous)
   Activity description: Market economies – Students read this article from the Financial Times – [A real market economy ensures that greed is good | Our intuitions about scale and centralisation are generally wrong. Available at: https://www.ft.com/content/01f74164-40fc-11e1-b521-00144feab49a.] The article compares the ‘invisible hand’ mechanism in free market economies to central planning, and discusses divergent outcomes on the Korean peninsula. Discussion question: Why is it that market economies can often allocate resources in a more efficient and robust way than centrally planned economies?
   Using AI for this activity: None

Key concept: Context and wider setting

CORE stresses that economic choices and decisions are always made in context. In Unit 1, the environment limits and frames much of what economic processes can achieve; and economic decisions are made within the framework of rules and policies. Make the students aware of the wider settings (environmental, historical, institutional) within which economic activity inevitably takes place.

1. Activity type: Exercise (asynchronous)
   Activity description: When is capitalism not dynamic – Students read this article from The Economist [https://www.economist.com/special-report/2018/11/15/western-governments-need-a-plan-for-reinstating-effective-competition.]. Based on the information in the article, explain which elements of Western economies are preventing capitalism from being dynamic in those countries.
   Using AI for this activity: None
2. Activity type: Exercise (asynchronous)
   Activity description: Of property and poverty – Students read this article from The Economist [https://www.economist.com/leaders/2006/08/24/of-property-and-poverty]. Using the examples in the media article, explain how the combination of markets, firms, and property rights can help economic development, as well as their limitations.
   Using AI for this activity: Students use an AI assistant to engage in a debate about the role of markets, firms, and property rights in economic development, using points from “Of Property and Poverty” by The Economist. They prompt the AI to argue the opposing stance to their own.
   Example Prompt:
   “I believe that strong property rights are essential for economic development because they encourage investment and growth. Please argue against my position and explain how property rights can sometimes hinder economic development.”

Key concept: The biosphere

This section discusses how the economy is embedded within the larger society and the biosphere and demonstrates some linkages.

1. Activity type: Data
   Activity description: Climate change data visualization – Project 1 of Doing Economics (https://www.core-econ.org/doing-economics/book/text/01-01.html) gets students to make charts with climate change data (how temperatures have changed over time, changes in temperature variability, correlation between temperature and CO2 emissions).
   Using AI for this activity: None
2. Activity type: Exercise (asynchronous)
   Activity description: Global warming impacts on business – Students read this article from The Economist [https://www.economist.com/graphic-detail/2019/02/25/how-global-warming-is-disrupting-business]. Discussion question: Choose two sectors in the economy and explain how the effects of global warming might affect those sectors.
   Using AI for this activity: None

Unit 2 teaching guide

Conceptual prerequisites:

• Unit 1

Building blocks in this unit:

• 2.2 Economic decisions: opportunity costs, and economic rents and incentives
• 2.3 Comparative advantage, specialization, and markets
• 2.4 Firms, technology and production
• 2.8 Economic models: How to see more by looking at less

Unit narrative

• Economic incentives (Section 2.2)
  Opportunity cost
  Economic cost
  Economic rent, innovation rent
  Relative prices
• Principles of economic modelling
  (Section 2.8)
  Ceteris paribus
  Endogenous and exogenous variables
  Equilibrium
• Model of gains from specialization and trade (Section 2.3)
  Absolute advantage
  Comparative advantage
  Specialization; division of labour
• Model of technology choice
  (Section 2.4-2.6)
  Technology; Factors of production
  Isocost lines
  Entrepreneur; Creative destruction
• Application: Industrial Revolution
  (Section 2.1, 2.7, 2.9-2.12)
  Escaping the Malthusian trap
  Role of institutions (capitalism, colonialism, enslavement), science, culture, and sociology
  Economic and environmental consequences

What’s important/difficult and how to teach it

Topic 1: Economic incentives

(Section 2.2)
This section introduces four concepts related to economic incentives and decision-making: opportunity cost, economic cost, economic rent, and relative prices. Familiarise yourself with the equations in this section that express the relationships between these concepts, and the decision rules that use these concepts.

Key concept: Opportunity cost

Students often forget that opportunity cost is the net benefit of the next best option, rather than all available options. Use Exercise 2.1 and 2.2 to solidify their understanding of this concept.

1. Activity type: Exercise (in-class)
   Activity description: Identifying opportunity costs – Give students some scenarios and ask them to identify the opportunity cost (in words) – for example, the opportunity cost of going to university (as in Exercise 2.2) or the opportunity cost of buying cereal at the supermarket.
   Using AI for this activity: Students use an AI assistant to generate scenarios involving economic decisions. They identify the opportunity cost in each scenario to solidify their understanding of the concept.
   Example Prompts:
   • First Prompt:
     “Provide a scenario where a student must choose between attending university or starting a full-time job after high school. Include the benefits and costs associated with each option.”
   • Second Prompt:
     “Provide a scenario where someone decides between buying a new smartphone or investing that money in a savings account with interest. Describe the potential outcomes of both choices.”

Key concept: Economic rent

The most important thing for students to understand is that an economic rent is something the actor gets, not something an actor pays (as in the common use of the term ‘rent’ for an apartment or a car). Students will see in future units that economic rents are part of profits. Clarify that innovation rent is a type of economic rent.

1. Activity type: MCQ
   Activity description: Calculating opportunity costs – Present some numerical scenarios as in Exercise 2.1 (but with different numbers) and ask students to calculate the opportunity cost and economic rent. You could alternatively present these scenarios as MCQs or as a poll.
   Using AI for this activity: None

Key concept: Relative prices

Emphasise that relative prices (rather than the absolute prices) matter for decisions. This concept will appear in both models in this unit.

1. Activity type: Exercise (in-class)
   Activity description: Application of concepts – Students read this article from The Economist[https://www.economist.com/briefing/2013/01/12/has-the-ideas-machine-broken-down]. In groups, students use the concepts of incentives, relative prices, and economic rents to explain the driving forces behind technological innovations, and why some people believe that technology-driven growth is slowing down.
   Using AI for this activity: None

Topic 2: Principles of economic modelling

(Section 2.8)
This section covers important concepts underlying all the models that appear in The Economy. Highlight the use of abstraction and simplification, ceteris paribus assumptions, and the general applicability of models. This section can either be taught in the order listed in the unit (a summary of the modelling approach used for the trade model and the technology choice model), or along with Section 2.2 as an introduction to the economic approach.

Key concept: Ceteris paribus

Emphasise that economic analysis typically involves holding all other factors constant aside from the factor of interest (only changing one factor at a time).
Endogenous and exogenous variables: These concepts are used throughout The Economy to distinguish between movements along a curve (endogenous) and movements of an entire curve (exogenous). A rule of thumb to help students: endogenous variables are those on the horizontal/vertical axes of the model’s diagram, while exogenous variables are not.
Equilibrium: This concept features in all the models in The Economy. Link the definition of equilibrium to the economic incentives in Section 2.2 (if individuals are doing the best they can they have no incentive to change their behaviour).

1. Activity type: Discussion
   Activity description: Principles of economic modelling – In groups, interpret the following statement (from the statistician George Box): “All models are wrong, but some are useful”. Have students come up with a list of criteria for a “useful” model and brainstorm as a class. (Students may want to refer to this Financial Times article [https://www.ft.com/content/4d5ea7c4-bd0d-11df-954b-00144feab49a] on the insights we can learn from economic models.)
   Using AI for this activity: Students use an AI assistant to generate criteria for a ‘useful’ economic model by interpreting George Box’s statement. They compare the AI’s criteria with their own to understand the principles of economic modeling.
   Example Prompts:
   • Prompt:
     “Interpret the statement ‘All models are wrong, but some are useful’ by George Box. List and explain criteria that make an economic model useful.”
2. Activity type: Discussion
   Activity description: Importance of assumptions – In groups, read this article from The Economist [https://www.economist.com/free-exchange/2014/06/19/why-they-crashed-too] and explain why economic models did not predict the global financial crisis (what assumptions were incorrect?).
   Using AI for this activity: None
3. Activity type: Exercise (in-class)
   Activity description: Building a model – Students apply the 6 steps in the “Model-building” box to the two models in this Unit (trade model and model of technology choice). For example, identifying the question(s) that the models aimed to answer, and which conditions change. (Note that not all steps apply to each model). Students can also apply the 6 steps to build a model of the market for umbrellas (as an extension of Exercise 2.10).
   Using AI for this activity: None

Topic 3: Gains from specialisation and trade

(Section 2.3)
This section uses the Ricardian trade model (2 people, 2 goods) to illustrate how specialization and trade can be mutually beneficial. The concept of specialization and division labour is then applied at the economy-level and the firm-level.

Key concept: Comparative advantage

Clearly establish the link between comparative advantage and opportunity cost. Emphasise that specialization and trade patterns depend on comparative advantage and not absolute advantage. Work through the numerical example in Figure 2.2 to explain why specialization and trade can be mutually beneficial even if one party has an absolute advantage in both goods. Students may find a diagrammatic representation of Figure 2.2c helpful (Instructors can refer to Figure 18.16a in The Economy 1.0).

1. Activity type: Discussion
   Activity description: Sources of comparative advantage – In groups or as a class poll, ask students to brainstorm the different sources of comparative advantage (e.g. natural resources, human capital). This article (Cai and Stoyanov, 2016)[ https://doi.org/10.1016/j.jinteco.2016.04.006] explains the consequences of population aging on comparative advantage and can be used to link back to the themes of between-country inequality from Unit 1.
   Using AI for this activity: Students use an AI assistant to create quiz questions about the Ricardian trade model. They verify the correctness of the AI-generated questions and answers, reinforcing their understanding of the model.
   Example Prompt:
   “Create five multiple-choice questions testing knowledge of the Ricardian trade model, including concepts like absolute advantage, comparative advantage, and gains from trade. Provide four answer options for each question and indicate the correct answer.”
2. Activity type: Poll; Discussion
   Activity description: Comparative advantage and trade patterns – take some country profiles from the OEC website (https://oec.world) and ask students to guess (based on comparative advantage) what the country’s main imports and exports are. This activity can be done to motivate the model or as an application after introducing the model.
   Using AI for this activity: None
3. Activity type: Poll; Game
   Activity description: Guess the country – OEC has a game called Tradle, where players have to guess the country based on its export mix and trade volume: https://oec.world/en/tradle/. Instructors can either use a few examples in a poll or have students play the game on their own and discuss their reasoning.
   Using AI for this activity: None
4. Activity type: Discussion
   Activity description: What’s missing from the model? In groups, students identify assumptions and simplifications made in the trade model. (This activity could be left until Section 2.8 is covered). Instructors may want to use this CEPR compilation[https://cepr.org/system/files/publication-files/60162-cloth_for_wine_the_relevance_of_ricardo_s_comparative_advantage_in_the_21st_century.pdf] as a prompt (Chapters 3 and 4 discuss the assumptions of the Ricardian Trade model and empirical evidence).
   Using AI for this activity: None
5. Activity type: Discussion
   Activity description: Specialisation and computers – Students read this Financial Times article[https://www.ft.com/content/5788fb32-efb9-11e7-ac08-07c3086a2625] and use the concept of specialisation to examine recent changes in the workplace and consequences for productivity.
   Using AI for this activity: Students use an AI assistant to create writing prompts about the impact of specialization on productivity and trade. They select appropriate prompts and write short essays (approximately 100 words each), enhancing their comprehension of the topic. Example Prompt: “Generate three writing prompts that explore the concept of specialization and its effects on productivity and international trade, suitable for undergraduate economics students.”
6. Activity type: Exercise (asynchronous)
   Activity description: Exercise 2.3 (extension) – As an extension, ask students to work out the range of prices for which trade would be mutually beneficial.
   Using AI for this activity: None

Topic 4: Modelling a firm’s choice of technology

(Section 2.4-2.6)
These sections build a model of technology choice. Technologies are defined according to their energy-to-labour ratio and the firm chooses the lowest-cost technology. This model is used to explain how creative destruction occurs and, in later sections, explain the role of incentives (relative prices) in prompting the Industrial Revolution in the UK.

Key concept: Technology

This unit uses fixed-proportions technology, meaning that to increase output, both inputs need to increase in a specified ratio.
1) Labour-intensive and energy-intensive technologies are defined by the ratio of energy to labour required to produce a given output (the steps in Figure 2.5 explain these concepts in detail).
2) Emphasise that to compare technologies, we need to hold output fixed. The concept of dominance is used to rule out inferior technologies (work through the steps in Figure 2.6 to ensure students understand the definition of “dominates” and “dominated”).
Isocost lines: Emphasise that along an isocost line, the total cost of production of 100 meters of cloth remains the same for all technologies.
The slope of the isocost line depends on the relative prices of labour and energy. The steps in Figure 2.10 explain how relative prices affect the firm’s choice of technology.

1. Activity type: Exercise (in-class)
   Activity description: Examples of creative destruction – In groups, ask students to come up with recent examples of creative destruction (for example, finding case studies in the newspaper). You can use the example in Section 2.1 (suit-making technologies) as a prompt, or this article from The Economist on steelmaking technologies[https://www.economist.com/business/2017/03/09/new-technologies-could-slash-the-cost-of-steel-production]. Students can use a diagram like Figure 2.10 to illustrate their chosen example.
   Using AI for this activity: Students use an AI assistant to generate recent examples of creative destruction. They evaluate the AI’s suggestions and select examples to illustrate the concept, reinforcing their understanding.
   Example Prompt:
   “List five recent examples of creative destruction in various industries, explaining how new technologies or business models have replaced older ones.”
2. Activity type: Discussion; Exercise (asynchronous)
   Activity description: How dynamic is capitalism? – in groups, students read this article from The Economist[https://www.economist.com/briefing/2016/03/26/too-much-of-a-good-thing] and discuss the extent to which Schumpeter’s ‘creative destruction’ is happening in the US. This activity could be an assignment where students analyse a country of their choice.
   Using AI for this activity: None
3. Activity type: Exercise (asynchronous)
   Activity description: Drawing isocost lines – Build on Exercise 2.5 by asking students to find the range of relative prices (or one example of relative prices) for Figure 2.8 that would make technologies A, B, and E (respectively) the lowest-cost technology.
   Using AI for this activity: None

Topic 5: Application to the Industrial Revolution

(Section 2.1, 2.7, 2.9-2.12)
These sections use the model of technology choice to explain why the Industrial Revolution occurred in the UK (Section 2.7). It is important to emphasise that relative prices is one explanation, not the explanation, because science, culture, and other institutions (colonialism, enslavement) played a vital role (Section 2.9 and 2.12). The remaining sections explore the consequences of the Industrial Revolution: while it enabled countries to escape the Malthusian Trap (Section 2.10), the environmental consequences mean that energy-intensive growth is unsustainable (Section 2.11).

Key concept: Industrial Revolution (Section 2.7, 2.9, 2.10, 2.12)

1. Activity type: Discussion
   Activity description: Relative prices and the Industrial Revolution – Watch the (5-minute) video of Bob Allen’s theory of why the Industrial Revolution happened in the UK first (from Exercise 2.7) and read this article from The Economist[https://www.economist.com/finance-and-economics/2018/08/02/the-industrial-revolution-could-shed-light-on-modern-productivity]. In groups, have students discuss the evidence that supports/does not support Bob Allen’s explanation for the Industrial Revolution. Why is it difficult to determine whether his explanation is correct?
   Using AI for this activity: Students use an AI assistant to engage in a debate about why the Industrial Revolution happened first in the UK. They explore Bob Allen’s high-wage economy theory and consider alternative explanations, using the AI to provide counterarguments and deepen their understanding.
   Example Prompts:
   • First Prompt:
     “After watching Bob Allen’s video explaining his theory on why the Industrial Revolution began in the UK, summarize his main arguments about the high-wage economy. Provide supporting evidence from the accompanying Economist article.”
   • Second Prompt:
     “Present counterarguments to Bob Allen’s theory, discussing other factors that may have contributed to the Industrial Revolution occurring in the UK. Include points about science, culture, colonialism, and institutions from additional sources.”
2. Activity type: Exercise (in-class)
   Activity description: Alternative explanations for the Industrial Revolution – Have students think of further factors that may have contributed to the Industrial Revolution or made some countries develop early, rather than later (using the two papers in Exercise 2.8 and this article from the Financial Times [https://www.ft.com/content/b7ad1c68-59fb-11e2-b728-00144feab49a] as a starting point). Students could be split into two groups. One group presents the argument, the other group criticizes/evaluates it. Groups could alternate.
   Using AI for this activity: Students use an AI assistant to generate a comprehensive study guide summarizing key factors that contributed to the Industrial Revolution, including any missing elements and applying modeling concepts from Section 2.8.
   Example Prompt:
   “Create a detailed study guide outlining the main factors that led to the Industrial Revolution. Include economic reasons like relative prices, as well as scientific, cultural, and institutional factors such as colonialism and enslavement. Apply economic modeling concepts to analyze these factors.”
   Students use an AI assistant to simulate conversations with historical figures associated with the Industrial Revolution. They assess the AI’s responses for accuracy and consistency with historical records.
   Example Prompts:
   First Prompt:
   “As James Watt, explain how your improvements to the steam engine contributed to the Industrial Revolution. Discuss the challenges you faced and the impact of your invention on industry and society.”
   Second Prompt:
   “As a British factory worker during the early Industrial Revolution, describe your daily life, working conditions, and how industrialization has affected you and your community.”
3. Activity type: Discussion
   Activity description: What’s missing from the model? Have students review Figure 2.18 (Section 2.10) and brainstorm important factors that are left out of the story. This activity helps students apply the modelling concepts from Section 2.8.
   Using AI for this activity: None

Key concept: Environmental consequences of the Industrial Revolution (Section 2.11)

1. Activity type: Discussion
   Activity description: “The magic washing machine” – Watch Hans Rosling’s TED talk video[https://tinyco.re/7334115] and in groups, have students discuss the benefits and drawbacks of labour-saving technologies. Use the discussion to stimulate debate around the relationship between growth, inequality, and the environment. This TED talk by Andrew McAfee (15 minutes) about the future of work can complement the discussion or be used as an alternative.
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: The future of economic growth – Divide the class into groups of three, where each person watches a different TED talk (each video is around 10 minutes long): Robert Gordon[https://www.youtube.com/watch?v=PYHd7rpOTe8], Erik Brynjolfsson[https://www.youtube.com/watch?v=lsdgdgJb3IM], and the debate about economic growth[https://www.youtube.com/watch?v=ofWK5WglgiI]. Discuss the following: Which arguments do you find most convincing? Are you optimistic or pessimistic about the future of economic growth? Explain your reasoning.
   Using AI for this activity: None
3. Activity type: Exercise (asynchronous)
   Activity description: Exercise 2.15 and 2.16 – As an extension to Exercise 2.15 (GDP per capita use and energy use) or Exercise 2.16 (environment quality and economic growth), students could prepare a report or poster presentation of their findings.
   Using AI for this activity: None

Unit 3 teaching guide

Required Building Blocks:

• 2.2 Economic Decisions and 2.8 Economic models

Building blocks in this unit:

• 3.2 – 3.5 (or 3.6) Constrained choice problems
• 3.7 Income and substitution effects

Unit narrative

• Preferences: What do we want?
  (Section 3.3)
  Utility
  Indifference curves
  Marginal rate of substitution
• Constraints: What is technically or physically possible? (Section 3.4)
  Feasible frontier, feasible set
  Opportunity cost
  Marginal rate of transformation
• Preferences + constraints: What do we
  choose? (Section 3.5)
  MRS = MRT
• What happens when constraints change? (Section 3.6-3.7)
  Income effect
  Substitution effect
• Application: Explaining working hours across countries and time (Sections 3.1, 3.9-3.12)
  Veblen effects (3.10)
  Gender division of labour (3.11)
  Differences in preferences (3.12)

What’s important/difficult and how to teach it

Topic 1: Introduction

(Section 3.1)
Unit 3 is a foundational unit that fully introduces the constrained decision-making framework and a number of critical concepts including feasible sets, opportunity cost, preferences, and indifference curves, used throughout CORE. CORE introduces the entire framework in a single unit by approaching the theory through a data-based example on average working hours (over time and across countries). Keep the motivating empirical example of changes in average wages in clear focus when the concepts are being discussed and developed.
This unit contains the building block on constrained choice problems, which is used extensively in other units. It may be a good idea to emphasize to students that this is a key framework which they will need a solid understanding of. Instructors who are pressed for time could teach only the building block and set some of the applications as (optional) reading.

Key concept: Constrained choice problem

This modelling framework is used in several later units, including:

• Unit 5 in a general equilibrium setting
• Unit 6 in wage-setting and the employment contract
• Unit 7 in the firm’s pricing decision
• Unit 9 in the intertemporal choice problem

1. Activity type: Data
   Activity description: Interactive graphs – Interactive versions of Figures 3.1 and 3.2 are available at OWiD. Instructors can ask students to identify and discuss features of these two graphs. Two helpful questions are – ‘What do you notice?’ and ‘What do you wonder?’.
   Our World in Data (https://ourworldindata.org/time-use) also a very interesting set of has cross-country graphs on time use spent on various activities and a brief discussion of relevant research to help students interpret these graphs
   Using AI for this activity: None

Topic 2: Constraints: What is technically or physically possible?

(Section 3.2, 3.4)

Key concept: Feasible frontier, budget constraint and feasible set

• make sure the students understand the link between Figure 3.3 (relationship between income and hours worked) and Figure 3.6 (the budget constraint). noting the difference in the x-axis variable: for the budget constraint diagram, we want both axes to contain “goods” rather than “bads”.
• Emphasize the difference between the “feasible frontier” (the line) and the “feasible set” (the area enclosed by the line). Go through Figure 3.6 carefully, focusing on the interpretation of points that are in the feasible set, on the frontier, and outside the frontier.
• Students also get confused over the difference between “feasible frontier” and “budget constraint” (the budget constraint is a specific example of a feasible frontier).

1. Activity type: Exercise (in-class)
   Activity description: Drawing budget contraints – Present different scenarios and ask students to discuss how the budget constraint might change. For example, How do we represent a change in income? How can we represent a change in wages? How would we represent an overtime wage which began after 8 hours of work at a basic wage? How would we represent a basic income received regardless of hours worked?
   Using AI for this activity: Students use an AI assistant to generate explanations of the feasible frontier concept. They then fact-check these explanations against course materials and reputable sources to ensure accuracy and deepen their understanding.
   Example Prompt:
   “Explain the concept of the feasible frontier in the context of constrained choice problems. Provide examples to illustrate how changes in income or wages shift the feasible frontier.”

Key concept: Marginal rate of transformation (MRT)

“marginal” is introduced in a discrete manner i.e. a 1-unit increase in the x-axis value. Emphasise that the slope of the feasible frontier is the MRT.

1. Activity type: Exercise (in-class)
   Activity description: Drawing budget constraints (2) – instructors could ask students to draw their own daily (or weekly) budget constraint (for students who don’t have part-time work or hourly income, they could use the average part-time wage as an example).
   Using AI for this activity: None

Key concept: Opportunity cost

This concept was introduced in Unit 2 (Section 2.2). For a concrete interpretation, demonstrate the link between opportunity cost and the slope of the feasible frontier.

1. Activity type: Extension
   Activity description: Drawing budget constraints (3) – Instructors could ask students to think about how income tax affects the budget constraint (if there are income tax brackets, the budget constraint will be a piecewise function).
   Using AI for this activity: None

Topic 3: Preferences: What do we want?

(Section 3.3)

Key concept: Indifference curves

The analogy with contour maps can help students understand the concept of an indifference curve “map”. It is important for students to realize the relationship between the slope of the indifference curve and the marginal rate of substitution.

1. Activity type: Exercise (asynchronous)
   Activity description: Draw your own indifference curves – As an introduction to the concept of indifference curves and MRS, you could ask students to draw their own indifference curves for consumption and free time. For example, ask them to pick a point in the consumption–free-time space, e.g. $20 and 20 hours of free time. Then, ask them to plot some points that make them equally happy: how much money would you be willing to give up for 2 extra hours of free time? How much money would you need to accept to give up 2 hours of free time?
   Using AI for this activity: Students use an AI assistant to generate and visualize their own indifference curves for consumption and free time. They utilize ChatGPT to receive step-by-step guidance on drawing and interpreting these curves, enhancing their understanding of preferences and the Marginal Rate of Substitution (MRS). This exercise helps students grasp how different utility levels are represented and how trade-offs between consumption and free time are analyzed.
   Example Prompt:
   “ChatGPT, draw indifference curves for a consumer with preferences over consumption and free time. Explain how these curves represent different utility levels and describe the MRS between consumption and free time. After drawing, ask me how I would adjust the curves if my preference for free time increases.”
2. Activity type: Exercise (asynchronous)
   Activity description: Interactive tool – This indifference curve visualization lets students (intuitively) see how relative preferences for the x-axis and y-axis good affect the shape of indifference curves: https://www.econgraphs.org/graphs/v1/micro/consumer_theory/indifference_curves?textbook=varian (with the caveat that the examples are for the 2-good case rather than wages-free time). In general, the EconGraphs webpage (https://www.econgraphs.org) has helpful interactive visualizations that can aid students in understanding some of the concepts in Unit 3 (such as budget constraints).
   Using AI for this activity: None

Topic 4: Preferences meet constraints: What do we choose?

(Section 3.5, 3.8)
Students put preferences and constraints together to understand how individuals make choices. Here, you may want to remind students of the overarching question (how individuals choose working hours).

Key concept: MRS=MRT

Make sure the students fully appreciate the MRS=MRT condition. While this unit does not require knowledge of calculus, students should be familiar with what “tangency” means (two lines/curves touching but not intersecting). Go through the steps in Figures 3.7a carefully so students know why the tangency point is optimal (rather than any other point in the diagram).

1. Activity type: Exercise (in-class)
   Activity description: What should Karim do? – It is important that students understand that the graphs in unit 3 describe a situation where a person is making a decision. In order to help solidify this point, one helpful activity is to start at points that are not tangency points and ask “What should the person do?” For example, starting at point B in figure 3.7a, you could ask “how much money would Karim be willing to give up in order to get one more hour of free time?” (That is the MRS – all relevant numbers are provided in Figure 3.7b but the point will still be clear if students estimate by eyeballing the figure). And then “How much money would Karim have to give up in order to get one more hour of free time?” (That is the MRT). And finally, “So what should Karim do?” – the answer is that he should choose to reduce his working hours by that one hour (and then reevaluate to see if he can do even better). Then you can move to point A and ask the same set of questions in reverse.
   Using AI for this activity: Students participate in an interactive discussion facilitated by ChatGPT to explore the Marginal Rate of Substitution (MRS) and Marginal Rate of Transformation (MRT). This activity reinforces the concept of equilibrium in constrained choice problems. By utilizing ChatGPT’s voice feature, the AI verbally explains the significance of MRS=MRT and provides illustrative examples to enhance understanding.
   Example Question:
   “Explain the significance of the MRS-MRT condition in achieving optimal economic choices. Provide examples to illustrate how tangency between indifference curves and feasible frontiers indicates equilibrium.”

Topic 5: What happens when constraints change?

(Section 3.6, 3.7)
This topic is conceptually challenging as it introduces income and substitution effects to analyse wage changes. Note that CORE uses the Hicks-Kaldor decomposition method, where the original feasible boundary is moved to be tangential to the new indifference curve to give the income effect first. Some other texts use the Slutsky decomposition method. Note also that the diagrams in these sections do not start with an x-axis value of 0, which might confuse students. It is possible to skip section 3.7 without loss of continuity.

Key concept: Income effect, substitution effect

Many students find it difficult to translate the definition of income and substitution effects to the feasible set-indifference curve diagram. Emphasise that income effects refer to changes in the size of the feasible set (consumption possibilities) and substitution effects refer to changes in the slope (relative prices). Go through the steps in Figure 3.9 carefully.

1. Activity type: Poll
   Activity description: Responses to a wage increase – Before defining the concepts of income/substitution effect, ask students how they would respond to a wage increase (work more, work less, no change to working hours). Return to the poll after introducing the concepts, linking their answers to the relative size of the two effects:
   Using AI for this activity: None
2. Activity type: Exercise
   Activity description: Drawing a graph – To help students clearly distinguish between the concepts of income and substitution effect, ask students to draw an example of a wage change where there is 1) an income effect but no substitution effect, 2) a substitution effect but no income effect.
   Using AI for this activity: None
3. Activity type: Exercise (asynchronous)
   Activity description: IE and SE Video tutorial – Students can watch a helpful video tutorial by Ramin Nassehi based on The Economy 1.0 (section 3.7) which is available here: https://www.youtube.com/watch?v=D5M4jiKPo4E
   Using AI for this activity: Students use an AI assistant to create a short story that illustrates the income and substitution effects in the context of working hours. This creative exercise helps students internalize economic concepts through narrative.
   Example Prompt: “Write a short story (300 words) about an individual who receives a significant wage increase and decides how to adjust their working hours. Highlight the income and substitution effects in their decision-making process.”
4. Activity type: Exercise (asynchronous)
   Activity description: UK’s highest-paid workers spend longest hours on the job (FT article) Available here: https://www.ft.com/content/0556d66a-394d-11ea-a6d3-9a26f8c3cba4. Can you describe the change in working hour patterns of low- and high-income workers by using a feasible set-indifference curve diagram? Discuss factors behind this change that cannot be captured by such diagram.
   Using AI for this activity: None

Topic 6: Explaining working hours

(Section 3.9, 3.10, 3.11, 3.12)
The final sections of Unit 3 apply the model to different empirical scenarios. Section 3.9 explains wage changes within countries over long time periods. Section 3.10 explains how Veblen effects and inequality affect working hours and consumption decisions. Section 3.11 extends the model of individual choice to household decision-making, where gender discrimination in paid work affects how time is allocated within the household. Section 3.12 uses the framework to explain cross-country differences in working hours.

Key concept: Veblen effects

Students should understand that some goods give utility from signalling (conspicuous consumption). Refer to the diagram in Question 3.12 to explain how Veblen effects change the shape of an individual’s indifference curves.

1. Activity type: Exercise (asynchronous)
   Activity description: Why is everyone so busy? Economist article – https://www.economist.com/christmas-specials/2014/12/20/why-is-everyone-so-busy. Use the concepts of income effect and substitution effect to explain the changes in time use mentioned in the article, and why these changes differ across groups of the population (e.g. rich vs. poor).
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Conspicuous consumption example – As an empirical example of the negative effects of conspicuous consumption, instructors can refer to the article ‘Luxury cars in Switzerland.’: https://doi.org/10.1016/j.joep.2011.08.013 (Findings: in Switzerland, one additional Ferrari or Porsche per 1,000 people would have the same effect on income satisfaction as a 27% reduction in household income, for everyone else in the neighborhood.) Instructors could use this article as a general discussion about how we could measure the negative effects of conspicuous consumption.
   Using AI for this activity: Students use an AI assistant to investigate the concept of Veblen effects and conspicuous consumption by creating visual representations that illustrate how luxury goods (such as cars) serve as status symbols and influence consumer behavior. This creative exercise helps students understand the non-material motivations behind certain economic decisions.
   Example Prompt:
   “Create a piece of art that represents Veblen effects and conspicuous consumption. Use elements like color intensity, symbolic shapes, and contrasting textures to depict how luxury goods function as status symbols and influence consumer choices.”

Key concept: Gender discrimination and the gender division of labour

We assume that adults in the same household have the same preferences and share goods equally, so the model of individual decision-making still applies. Compare Figures 3.21 and 3.22 to illustrate how gender discrimination in paid work affects the household’s choice of consumption and free time.

1. Activity type: Discussion
   Activity description: Domestic technology and time use – Watch this video where Hans Rosling explains the effect of the washing machine on womens’ free time (in this video). Discuss how improvements in domestic technology affect how we spend our time.
   Using AI for this activity: None

Key concept: Differences in preferences can explain cross-country differences in working hours

Students get confused over how we can tell whether representative individuals in different countries are likely to have the same preferences or not. Go through the steps in Figure 3.25, focusing on the US and the Netherlands. Emphasise that indifference curves of different individuals can cross but indifference curves of the same individual can’t cross.

1. Activity type: Exercise (asynchronous)
   Activity description: Working hours in Sweden – Students should read this article on working hours in Sweden (https://www.bbc.com/news/business-34677949) and then write a short paragraph comparing the feasible sets and indifference curves in Sweden to those of another country, e.g. the UK (mentioned in the article).
   Using AI for this activity: None

Unit 4 teaching guide

Conceptual prerequisites:

• Constrained optimisation model

Required Building blocks:

• Sections 3.2-3.5 (constrained choice problems)

Building blocks in this unit:

• Sections 4.2-4.4 (Game theory and Nash equilibrium)
• Section 4.5 (Pareto efficiency)
• Section 4.11 (Ultimatum game)

Unit narrative

• Fundamental concepts (Section 4.1-4.4)
  Game (players, strategies, payoffs)
  Best response
  Nash equilibrium
  Dominant strategy
• Social preferences (Section 4.7, 4.9)
  Self-interested preferences
  Social norms
  Altruism, Inequality aversion, Reciprocity
  Lab and field experiments
• Prisoners’ dilemma game
  (Section 4.4)
  Social dilemma
  Dominant strategy equilibrium
• Public goods game
  (Section 4.6, 4.8)
  Free-riding
  Repeated interaction
  Experimental evidence
• Ultimatum game
  (Section 4.10-4.12)
  Simultaneous game; sequential game
  Minimum acceptable offer
  Experimental evidence
• Coordination games
  (Section 4.13-4.14)
  Conflict of interest
  Hawk-Dove game
  Application: climate policy
• Evaluating outcomes (Section 4.5)
  Pareto criterion
  Pareto efficiency
  Fairness

What’s important/difficult and how to teach it

Topic 1: Fundamental concepts of game theory

(Section 4.1-4.4)
These sections introduce the fundamental elements of a game (players, strategies, information, and payoffs) and concepts that we can use to predict the outcome of a game (best response, dominant strategy, Nash equilibrium). Section 4.2 and 4.3 introduce a 2×2 game (the “invisible hand” game) where self-interested actions lead to the best outcome for both players. Section 4.4 introduces the prisoners’ dilemma game, an example of a social dilemma (self-interested actions lead to worse outcomes for all players).

Key concept: Social dilemmas

Social dilemmas occur when people do not take adequate account of the effects of their actions on others, whether these are positive or negative. This unit starts and ends with the pressing problem of climate change. You can link climate change back to how we are all connected to the natural environment and biosphere (Unit 1).

1. Activity type: Exercise (asynchronous)
   Activity description: Identifying social dilemmas – Exercise 4.1 asks students to find examples of social dilemmas in the news. Ask students to formulate these examples as a game, making sure to clearly define each element of the game (e.g. players, strategies, information). Assume that the two players move simultaneously. Rather than numbers, students can give ordinal words to the payoffs, such as “best”, “good”, “bad”, or “worst”.
   Using AI for this activity: None

Key concept: Game

Students should know how to define the five elements of a game (players, feasible strategies, order of play, information, payoffs).

1. Activity type: Exercise (asynchronous); Exercise (in-class)
   Activity description: Identifying the elements of a game – For each game presented in the unit, identify the 5 elements of the game (see Exercise 4.19 for a complete list). Instructors may want to leave this activity until after all the games have been taught, or use this activity as a way to introduce the various games covered in the unit.
   Using AI for this activity: None
2. Activity type: Exercise (in-class)
   Activity description: Summary of games in the unit – Have students complete Exercise 4.19 in groups (after covering the entire unit).
   Using AI for this activity: None

Key concept: Best response

When identifying the best responses, the students find it confusing that they need to go row-by-row to find the column player’s best response and vice versa for the row player. Encourage the students to use the ‘dot and circle’ approach taught in Figure 4.2b to identify the best responses. Practice at this stage will facilitate finding Nash equilibria later.
Nash equilibrium (NE): Encourage the students to locate the equilibrium using the dots and circles to find the Nash position in a normal-form game. To help students operationalize NE point out that (i) the equilibrium denotes a position of stability, and (ii) every normal-form game has at least one NE, which will be helpful for checking whether they have done the dot-and-circle approach correctly. The games in The Economy all have at least one pure-strategy Nash equilibrium. Note that CORE does not discuss mixed strategies or randomization (everything is in pure strategies). Figure 4.21 in Section 4.13 uses different payoffs in the crop-choice problem of Anil and Bala than is the case in the invisible hand game in Section 4.2, to produce an outcome where there are two Nash equilibria. Explicitly contrasting these two games makes for a good focus in a lecture.

1. Activity type: Poll
   Activity description: Changing the Nash equilibrium – To help students practice finding Nash equilibria, change some payoffs in Figure 4.2b and ask if the NE would change (e.g. in a poll, ask students if the NE would change if Anil’s payoffs from (Cassava, Rice) was 5 instead of 6? How about if the payoff was 3?).
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Game theory in the movies – As an extension to Exercise 4.2 (game theory in A Beautiful Mind), ask students to come up with other examples of game theory in movies and TV shows (some examples from “older” films here, with explanations of the game: https://www.gametheory.net/popular/film.html; 10 other examples including “newer” films here, with explanations of the game: http://www.tasteofcinema.com/2016/the-10-best-movies-about-game-theory/) Instructors can also refer to Burke et al. (2018) (http://downloads.journalofeconomicsteaching.org/3/1/1-3.pdf) for further examples.
   Using AI for this activity: Students use an AI assistant to generate a list of relevant academic and reputable sources related to the application of game theory in movies and TV shows. They then evaluate the relevancy and credibility of these sources, enhancing their research skills and understanding of game theory literature within the context of popular media.
   Example Prompt:
   “ChatGPT, generate a list of five academic articles or reputable sources that discuss the application of game theory in movies and TV shows. Provide brief summaries for each source.”

Key concept: Dominant strategy; dominant strategy equilibrium

A dominant strategy exists when there is an entire row or column of circles (using the ‘dot and circle’ approach). Emphasize that not every game has a dominant strategy. The students will need practice to recognize dominant strategies by doing exercises using the diagrammatic approach. It is worth focusing on Nash equilibrium, rather than dominant strategy equilibrium (Section 4.4), as students get confused as to when the concept of ‘dominant strategy equilibrium’ applies whereas the concept of Nash equilibrium is broader.
Prisoners’ dilemma game: The students easily confuse the general concept of ‘a prisoners’ dilemma’ with the specific prisoners’ dilemma game (with strategies Deny and Confess). Emphasize that “prisoners’ dilemma” is a type of game rather than a specific game. Students may also be confused between prisoners’ dilemma and social dilemma (they both have the word “dilemma” in them); social dilemma is the more general concept. Devote time to practice identifying and solving prisoners’ dilemmas, and to reflect on the distinction between them and the invisible hand game in the previous Topic.

1. Activity type: Discussion
   Activity description: Prisoners’ dilemma in game shows – As an extension to Exercise 4.3 (‘Golden Balls’ game show), students can read and discuss this example of the Prisoner’s Dilemma (the “Friend or Foe” gameshow in the US): https://www.nber.org/system/files/working_papers/w12097/w12097. pdf. Focus on comparing the behaviour of participants with the predictions of economic theory.
   Using AI for this activity: None
2. Activity type: Exercise (asynchronous)
   Activity description: Doping in sport – students read this Financial Times article on doping in sport[https://www.ft.com/content/3c0d4538-99c4-11e3-91cd-00144feab7de] and draw a payoff matrix to analyse this situation.
   Using AI for this activity: None

Topic 2: Evaluating outcomes

(Section 4.5)
This section introduces the Pareto criterion as one way to evaluate outcomes from a game (allocations). The limitations of Pareto efficiency and an additional criterion for evaluating outcomes (fairness) are briefly discussed. (Unit 5 elaborates on the concept of fairness).

Key concept: Pareto criterion

According to the Pareto criterion, allocation A is better than allocation B if at least one party would be strictly better off with A than B, and nobody would be worse off. Use the steps in Figure 4.6 to clarify the usage of “Pareto improvement” and “Pareto dominates/dominated”.
Pareto efficiency: Make sure the students understand how to identify Pareto efficient outcomes/allocations i.e. under the outcome shown, no-one can be made better off without someone else being made worse off. Once this concept is understood, separate it from other evaluation criteria: in particular, underscore the distinction between Pareto efficiency and fairness. Highlight the fact that Pareto efficiency is sometimes a very weak criterion on which to base policy decisions and points to resistance to a change in institutional arrangements.

1. Activity type: Exercise (asynchronous)
   Activity description: Using the Pareto criterion to compare outcomes – Students draw the outcomes of the rice-cassava game and thus verify the statement in the unit about which ones are Pareto efficient and Pareto dominated. Show students the payoff matrix of other 2×2 games in the unit (e.g. the cinema-football game in Question 4.2 or the coordination game in Figure 4.23c) and ask them to draw the outcomes, then assess which outcomes are Pareto efficient and Pareto dominated.
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Pareto efficiency in mechanism design – Students read this article from The Economist[https://www.economist.com/finance-and-economics/2007/10/18/intelligent-design]. Discuss the following questions: 1. With reference to the article, explain how Pareto efficiency can be used to design mechanisms. 2. How useful is the concept of Pareto efficiency in evaluating allocations?
   Using AI for this activity: None

Topic 3: Social preferences: types and measurement methods

(Section 4.7, 4.9)
Section 4.7 uses the framework of Unit 3 (indifference curves, feasible frontier) to illustrate how optimal choices differ depending on an individual’s preferences (altruistic vs self-interested). Section 4.9 covers two different methods that economists use to learn about people’s motivations (lab and field experiments), with examples. Note that this unit does not assume that self-interested behavior is in any way expected or ‘correct’. Instead, we appeal to the evidence, reinforcing CORE’s approach of critically appraising theory with real-world evidence and identifying which underlying assumptions need to be relaxed or modified.

Key concept: Social preferences

Social preferences are an explanation for the non-self-interested behavior we observe. Students often infer that social preferences can ‘solve’ social dilemmas, but we usually take preferences as fixed (very difficult to change) so social preferences are not a policy solution (we cannot ‘make’ people more altruistic). Students should also be aware that social preferences are just one potential explanation (usually not the only explanation unless the behavior was observed under a controlled experiment); in some cases, the observed behavior may also be consistent with self-interest (e.g. repeated interaction with punishment).
Altruism: Make it clear that an altruistic preference motivates someone to help others, even at a cost to that person. Students should understand how altruism affects the shape of an individual’s indifference curves and thus an individual’s preference ranking over outcomes/allocations. Use the steps Figures 4.11 and 4.12 to clarify these points.
Experimental methods: Students should be able to explain the usefulness and limitations of experiments. This section is a good opportunity to review some other methods of economic inquiry from earlier units (natural experiment, secondary data).

1. Activity type: Discussion
   Activity description: Extension of Exercise 4.10 (validity of lab experiments) – Discuss the advantages and limitations of the various ways that economists can investigate real-world questions: lab experiment, field experiments, natural experiments (discussed in Unit 1.10), secondary data (e.g. from government websites or organisations like the World Bank, OECD, and the IMF).
   Using AI for this activity: Students engage in a role-play where ChatGPT assumes the role of a professional economist. They interact with the AI economist to explore and understand the various methods economists use to investigate real-world questions, including lab experiments, field experiments, natural experiments, and secondary data analysis. This activity enhances their comprehension by simulating a mentorship or consultation with an expert, allowing them to critically evaluate the advantages and limitations of each research method.
   Example Prompt:
   “ChatGPT, act as a professional economist and explain the advantages and limitations of lab experiments, field experiments, natural experiments, and secondary data in investigating real-world economic questions. Provide examples of each method to help me understand how they are applied in practice.”

Topic 4: Public goods game

(Section 4.6, 4.8)
Section 4.6 describes the public goods game and compares its predictions to behaviour observed in the real-world (management of common pool resources). Section 4.8 discusses some experimental evidence of how repeated interaction, social norms, and peer punishment affect behaviour in the public goods game.

Key concept: Public goods game

Make sure you play this game BEFORE the students read Sections 4.6 and 4.8. This way, they will not have prior knowledge of the public goods game. If you are running this game in a large class, watch this video of students playing the game in a class of nearly 800 students[http://tinyco.re/5239657].
Altruism, reciprocity, inequality aversion: These concepts have a specific interpretation in Unit 4 (compared to how they may be used in everyday conversation), so make sure that students are familiar with the definitions. To make the distinction between different types of social preferences clear, link them to the public goods experimental evidence (Section 4.8) and get students to identify how the behavior of participants is consistent with each type of social preference (altruism, reciprocity, inequality aversion).

1. Activity type: Game
   Activity description: Playing the public goods game – Experiencing Economics, a companion text to The Economy, contains instructions on how to play this game[https://www.core-econ.org/experiencing-economics/instructors/book/text/01.html]. The instructor’s version (accessible if you have created a free CORE account) contains homework activities to accompany the experiment.
   Using AI for this activity: None
2. Activity type: Exercise (asynchronous)
   Activity description: Analysing behaviour in the public goods game – Exercise 4.9 gets students to analyse data from the public goods game (Figure 4.14). Alternatively, students can analyse the data they collected from playing their own public goods game. Project 2 of Doing Economics [https://www.core-econ.org/doing-economics/book/text/02-01.html] contains a set of Excel/R exercises that can be done individually or as an extended project.
   Using AI for this activity: None
3. Activity type: Discussion
   Activity description: Cooperation and common pool resources – Have students read Elinor Ostrom’s JEP article [https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.14.3.137] and discuss the conditions that are required for successful collective action. The article also discusses evolutionary game theory (in a non-technical way); students can learn theories about how social norms develop and evolve.
   Using AI for this activity: None
4. Activity type: Data; Exercise (asynchronous)
   Activity description: Real-world examples of common pool resources – Read Elinor Ostrom’s article “The Challenge of Common Pool Resources” [https://doi.org/10.3200/ENVT.50.4.8-21]. This article contains some data tables on environmental variables (e.g. fish stocks, forest area) that students can make graphs on. Students can also use game theory concepts to explain why the suggested policy solutions/rules for governance would work.
   Using AI for this activity: None
5. Activity type: Discussion
   Activity description: Communal resource management – Have students read this Financial Times article on communal resource management in Bali [https://www.ft.com/content/83df61cc-caf2-11e1-8872-00144feabdc0] and discuss: would the system of communal management of resources used in Bali be as effective on a larger scale, say, in a city? Why/why not?
   Using AI for this activity: None
6. Activity type: Discussion
   Activity description: The usefulness of managers – Students read this article in The Economist on the impact of managers on worker collaboration [https://www.economist.com/business/2019/10/13/the-usefulness-of-managers]. Discuss the results of the game and explain how the outcomes of the public goods experiments in the unit and in the article depend on players’ incentives and preferences.
   Using AI for this activity: Students engage in a role-play where ChatGPT assumes the role of professional economists with expertise in management theories. They interact with the AI economist to analyze and discuss the findings from the article “The usefulness of managers” published in The Economist. The discussion will explore how these findings relate to historical perspectives on management, referencing economists like Frederick Taylor, known for Scientific Management, and Elton Mayo, known for the Hawthorne Studies. This activity enhances students’ understanding of how historical management theories apply to contemporary organizational behaviors and the role of managers in fostering worker collaboration.
   Example Prompt:
   “ChatGPT, act as a professional economist with expertise in management theories. Discuss from different perspectives how the findings from the article ‘The usefulness of managers’ relate to historical perspectives on management. Reference economists like Frederick Taylor, known for Scientific Management, and Elton Mayo, known for the Hawthorne Studies.”

Topic 5: The ultimatum game

(Section 4.10-4.12)
Sections 4.10 and 4.11 describe the ultimatum game. Section 4.12 shows some experimental evidence (Kenyan farmers and US students) and discusses the potential motivations of the Proposer and Responder. Section 4.12 uses the effect of competition in the ultimatum game to show how institutions (the rules of the game) can affect outcomes.

Key concept: Ultimatum game

Ensure that students can identify the 5 elements of this game. Note that unlike the simultaneous games described in earlier sections, this game is sequential.
Minimum acceptable offer: This term refers to the offer at which the satisfaction of accepting the Proposer’s offer is equal to the satisfaction the Responder would get from refusing the offer and getting no money, but ensuring that the Proposer also gets nothing. The extension to Section 4.11 goes through a numerical example.

1. Activity type: Poll
   Activity description: Playing the ultimatum game – Play the ultimatum game in class. Alternatively, have a quick polling question asking students how they would behave if they were the Proposer (how much they would offer) or the Responder (minimum offer they would accept). As an extension, ask how students would behave if they were competing with another Responder for the offer. Compare the class results to Figures 4.17, 4.18a, and 4.20.
   Using AI for this activity: None
2. Activity type: Poll
   Activity description: Ultimatum game with more than one Proposer – have students discuss how the Proposer/Responder’s behaviour might change if there were two Proposers and one Responder. Use polling questions describing these scenarios (how would students behave if they were the only Proposer? How would students behave if there was one other Proposer?) and compare students’ answers.
   Using AI for this activity: None
3. Activity type: Discussion
   Activity description: Strikes and the ultimatum game – As an extension to Exercise 4.15, discuss factors that affect the outcomes of this game (types of offers made by Proposer and whether the offers are accepted by the Responder). Have students discuss what’s missing from the setup (e.g. multiple rounds of negotiation, mediation by a third party).
   Using AI for this activity: Students participate in an AI-mediated negotiation to resolve coordination problems. ChatGPT acts as a mediator or a third-party facilitator, helping students negotiate and reach an agreement in a coordination game with conflicting interests. This activity demonstrates how communication and negotiation can help achieve a mutually beneficial equilibrium.
   Example Prompt:
   “ChatGPT, act as a mediator to help us resolve a coordination problem where one group wants to adopt Technology A and another prefers Technology B. Facilitate our negotiation to find a mutually agreeable solution.”
4. Activity type: Exercise (in-class)
   Activity description: Greek debt negotiations – Have students read this Financial Times article [https://ftalphaville.ft.com/2015/02/18/2119447/greek-games-in-theory-and-practice/] and draw a sequential game to illustrate the situation described. Ask students to give another example of a situation where appearing to act irrationally can provide a higher payoff.
   Using AI for this activity: None
5. Activity type: Exercise (in-class); Exercise (asynchronous)
   Activity description: Pay negotiations in the NBA – Have students read this article in The Economist on pay negotiations in the NBA [https://www.economist.com/game-theory/2011/11/15/thanks-but-no-thanks] and draw a game tree to illustrate and analyse the potential outcomes of this situation. Discuss/explain how the legal system helps break the deadlock in negotiations.
   Using AI for this activity: None

Topic 6: Coordination games

(Section 4.13-4.14)
These sections present 2×2 games with 2 Nash equilibria (in contrast to games from earlier sections, which had a unique pure-strategy Nash equilibrium). The multiple equilibria create conflicts of interest over which equilibrium to coordinate on. Section 4.14 models climate policy as a coordination game and discusses coordination mechanisms.

Key concept: Coordination games

The choice of climate policy is represented as a specific type of coordination game called the ‘Hawk-Dove’ game (Figure 4.23). In this game, the players want to coordinate on the opposite action from their opponent; in each of the Nash equilibria, (Hawk, Dove) and (Dove, Hawk), the Hawk obtains the higher payoff; but both players choosing Hawk is the worst outcome for both.

1. Activity type: Exercise (in-class); Exercise (asynchronous)
   Activity description: The climate change game – The unit discusses 4 mechanisms that could affect the climate change game (change in lifestyles, innovation of clean technologies, change in norms, sharing costs of “restrict”). Ask students to redraw Fig 4.23c to illustrate the effect of these mechanisms.
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Barriers to climate change action – We have known much about climate change for decades, yet we have done relatively little to stop it. Ask students to identify barriers to climate change action (and explain why). The discussion in Section 20.2 of The Economy[https://www.core-econ.org/the-economy/book/text/20.html#202-climate-change] gives five reasons that make climate change and other environmental problems difficult to tackle.
   Using AI for this activity: None
3. Activity type: Discussion; Game
   Activity description: Role of culture in playing coordination games – Have students read and discuss this article [https://www.pnas.org/doi/full/10.1073/pnas.1400826111] where researchers compared how people from India and the US play a 3×3 coordination game (with someone of their population and someone of the other population). (The researchers find that the players’ cultural background affects how they play the game.) You could play the game in class.
   Using AI for this activity: Students use an AI assistant to explore how cultural differences influence strategies in coordination games. By simulating behaviors of players from different cultural backgrounds, students analyze how cultural norms and values shape decision-making in coordination scenarios. This activity enhances understanding of the role of culture in strategic interactions.
   Example Prompt:
   “ChatGPT, simulate how players from Japan or England might approach the coordination game in this paper https://www.pnas.org/doi/full/10.1073/pnas.1400826111. Discuss how cultural norms influence their strategies.”
4. Activity type: Discussion
   Activity description: Driving on the left vs right side of the road – ask students to model this scenario as a coordination game. In 1967, Sweden changed the side of the road that people drive on. Students can read this BBC article and discuss the costs/efforts required to switch the equilibrium (https://www.bbc.com/worklife/article/20180417-a-thrilling-mission-to-get-the-swedish-to-change-overnight). This 1.30-minute video explains how history influenced the side of the road that countries drive on[https://www.businessinsider.com/uk-china-countries-drive-left-side-road-traffic-ancient-rome-sword-fight-2016-12?r=US&IR=T]
   Using AI for this activity: None
5. Activity type: Discussion
   Activity description: The Montreal protocol – Students read this article from The Economist article [https://www.economist.com/international/2016/09/24/to-coldly-go]. Discussion questions: 1. Use the game theory framework in the unit to explain the environmental outcomes of Montreal protocol. 2. Evaluate the success of the Montreal protocol in mitigating climate change.
   Using AI for this activity: None
6. Activity type: Discussion
   Activity description: NATO and international coordination – Have students read this article in The Economist article on NATO [https://www.economist.com/special-report/2019/03/14/nato-members-promise-of-spending-2-of-their-gdp-on-defence-is-proving-hard-to-keep]. In groups, use the concepts discussed in the unit to explain why the NATO agreement is not as successful as its members hoped it would be.
   Using AI for this activity: None

Key concept: Conflicts of interest

A conflict of interest occurs in a coordination game if players in the game would prefer different Nash equilibria. Sections 4.13 and 4.14 discuss various ways to change the rules of the game to resolve these conflicts of interest (e.g. transfers between players, sequential moving).

1. Activity type: Game
   Activity description: Resolving coordination problems – Exercise 4.16 asks students to consider some ways of resolving the coordination problem in Figure 4.22. As an extension, get students to play the game under some of these conditions (e.g. with/without negotiations) and compare the outcomes.
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Equilibrium selection – As an extension to Exercise 4.17 (the web browser wars), ask students to come up with other examples of competing products/technologies (e.g. QWERTY vs Dvorak keyboard, Apple vs Android smartphones, social network sites) and explain the factors that led to one equilibrium being selected over another (or one technology becoming dominant).
   Using AI for this activity: None

Unit 5 teaching guide

Required Building blocks:

• Constrained choice problems (sections 3.2 – 3.5)
• Game theory and Nash equilibrium (sections 4.2 to 4.4)
• Section 1.6 – Production functions and diminishing APL
• Section 4.5 – Pareto Efficiency
• Also required – section 4.11 – Ultimatum game

Building blocks in this unit:

• Section 5.12 – The Gini coefficient

Unit narrative

• Institutions (section 5.2)
  Institutions
  Power
• Criteria for evaluating an allocation
  Pareto efficiency (unit 4, section 4.5)
  Fairness (section 5.3)
• Angela and Bruno
  – setting up the model (Section 5.4)
  Preferences
  Technology
• Baseline case – Angela as an independent farmer (Section 5.5)
• Case 1: Forced Labour (Section 5.6)
• Case 2: A take-it-or-leave-it contract (Section 5.7)
• Case 3: Bargaining in a democracy
  (Sections 5.8, 5.9)
• Lessons Learned
  (Sections 5.10)
• Inequality
  Endowments, technology and institutions (Section 5.11)
  Measuring inequality (Section 5.12)
  Promoting equality and efficiency – Operation Barga (section 5.13)
• Application: Bargaining over wages,
  pollution and jobs (Section 5.14)

What’s important/difficult and how to teach it

Topic 1: introduction

(Sections 5.1 – 5.3)
How do institutions influence the allocation of a good between parties? How do we evaluate such an allocation in terms of efficiency and fairness?

Key concept: Institutions, rules of the game

Another common source of confusion is the term institutions. Institutions in the text do not refer to the layman’s definition of physical buildings or organizations. Rather, institutions are the “rules of the game”. You should explicitly mention these misconceptions.

1. Activity type: Game
   Activity description: Fishing game – two versions. To demonstrate the importance of institutions and how a change in institutional arrangements can change the outcomes of a game, instructors could play two versions of the fishing game with their students – available on classEx (classEx.de – you will need to register). Students can see how playing the game with and without punishment can lead to dramatically different outcomes.
   Using AI for this activity: None
2. Activity type: Game; Poll
   Activity description: Ultimatum game vs Dictator game – To illustrate how institutions can affect outcomes, have students play both the ultimatum game and dictator game, then compare the results. Alternatively instructors could have a quick poll asking students how they would behave (as the Proposer) in both scenarios.
   Using AI for this activity: None
3. Activity type: Discussion
   Activity description: Student clubs and societies – Instructors could ask students about the institutions that govern the clubs and societies they belong to on campus. For example: what is the role of the president, how are they selected, does anyone in the club have veto power over decisions? (Depending on the way students discuss the workings of their clubs, this may also provide an opportunity to distinguish between institutions and culture).
   Using AI for this activity: None

Key concept: Structural power and bargaining power

structural power has to do with one’s own reservation option (next best alternative) and the ability to influence the other player’s reservation option. Once the reservation options of the two players have determined the most and least that each player can attain (such that the interaction will take place), bargaining power determines how the surplus is divided between the two players.

1. Activity type: Discussion
   Activity description: Structural and bargaining power – Can you think of people or groups who have a strong reservation option in a specific situation? Or a weak reservation option? For example, immigrant workers whose residency depends on their employer may have a weak reservation option because if they lose the job they may have to leave the country. A worker with specialized skills may have a strong reservation option because if they decline a job offer, they are likely to have another offer. But the employer may also have other qualified candidates. In the process of interviewing the worker and making an offer, what could the firm possibly do to increase their bargaining power? Another case to discuss could be an entrepreneur who wanted to sell their business – under what circumstances might they have structural power? What factors might affect their bargaining power?
   Using AI for this activity: Students engage in a simulated negotiation exercise using an AI assistant to explore concepts of structural and bargaining power. The AI takes on the role of a negotiation partner with varying levels of reservation options. Through multiple negotiation scenarios, students experience how different reservation options and bargaining strategies impact the division of surplus. This activity helps students understand how power dynamics influence economic interactions and outcomes.
   Example Prompt:
   “ChatGPT, let’s simulate a negotiation where I’m an employee with specialized skills, and you’re an employer making a job offer. I have other job offers lined up. Let’s negotiate the salary and discuss how our reservation options affect the bargaining process.”

Key concept: Pareto efficiency

Pareto efficiency is defined in section 4.5 (unit 4). Students may have their own interpretations of what efficiency means. Stress clearly the way that economists use the term and its relevance. Draw attention to the glossary and the importance of precision in the use of this term.

1. Activity type: Discussion
   Activity description: Application of Pareto efficiency – Have students read this article in The Economist about Pareto efficiency and mechanism design: https://www.economist.com/finance-and-economics/2007/10/18/intelligent-design. To discuss: 1) With reference to the article, explain how Pareto efficiency can be used to design mechanisms. 2) How useful is the concept of Pareto efficiency in evaluating allocations?
   Using AI for this activity: None

Key concept: Fairness

The text puts emphasis on substantive and procedural fairness but there can be multiple conceptions of what is fair. Stress the latter to avoid confusion among students with the use of the term. Referring to the examples in Section 5.3 to clarify the distinction between substantive and procedural fairness helps.

1. Activity type: Discussion
   Activity description: Fairness – Exercise 5.4 (splitting the profits in a partnership) would make a good discussion activity. You could create a poll which allows student to select their most preferred option (and then in a second poll their least preferred option). Display the results to the class to stimulate discussion on the meaning of fairness. There is no definitive answer. The students will have to debate the good and bad points of the alternatives based on the concepts of substantive and procedural fairness.
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Bankers’ bonuses and fairness – Have students read this article in The Economist about banker’s bonuses in the EU: https://www.economist.com/finance-and-economics/2013/03/09/tilting-the-playing-field. Discuss: Using the concepts of substantive and procedural fairness, discuss whether you think bankers’ bonuses are fair. Do you think bankers’ bonuses should be capped?
   Using AI for this activity: None

Topic 2: Angela and Bruno: Three Cases (sections 5.4 to 5.10)

A set of cases where the players preferences and the technological constrsaints are held constant, but the rules of the game differ, resulting in different outcomes.

Key concept: Production function and feasible frontier

it is important that students understand where the feasible frontier comes from: it is determined by the available technology (reflected in the production function). It may be helpful to draw out the production function and the feasible frontier point by point (using the numbers provided in the text), and side by side. Note that in order to avoid confusing, a change in technology which would push out the production function has not been included in this unit, so that everything except for the changing institutions is held constant.

1. Activity type: Discussion
   Activity description: Context-specific examples – The cases in this unit discuss institutional frameworks that have been common throughout history and have been manifested in different ways in different places. This presents an opportunity for instructors to include material that is specific to their own context (please also feel free to share this on the community forum to help out other teachers in a similar context!). Context-specific data or examples could be tailored to facilitiate class discussion.
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Reservation option of low-wage workers – Have students read this Financial Times article about the reservation option of sweatshop workers: https://www.ft.com/content/2d9d8c2a-958d-11e6-a80e-bcd69f323a8b. Use the concepts in the Angela-Bruno framework to discuss what the experiment conducted on Ethiopian manufacturing workers suggests about the workers’ reservation option and outcomes of the worker-employer interaction.
   Using AI for this activity: None

Key concept: Allocation vs outcome

in this unit, the term allocation is used to describe any point which demonstrate Angela’s hours of free time, as well as Angela and Bruno’s bushels of grain, respectively. The term outcome is only used to describe an allocation that is the final result of an interaction.

1. Activity type: Exercise (asynchronous)
   Activity description: Sharecropping – This brief introduction and set of videos discusses the transition, in the US south, from chattel slavery to sharecropping at the end of the US Civil War, and the similarities between the two systems. https://www.pbs.org/tpt/slavery-by-another-name/themes/sharecropping/. Writing exercise – Write a few sentences, based on the information and videos on the above webpage, about why sharecropping could be “slavery by another name.”. Discuss which of the cases in unit 5 would describe the situation of sharecropping most accurately. (Note to instructors – case 2 – the take-it-or-leave-it contract – discusses a fixed rent, this is easier to portray than sharecropping because under sharecropping the tenant pays a share of the output rather than a fixed rent. However, the key question for students is the extent to which farmers could walk away from the “offer”).
   Using AI for this activity: None

Key concept: Quasi-linearity

Students do not necessarily need to know this term or its technical definition, but they should understand that in order to make the diagrams less complicated, all we are doing is holding MRS constant at each level of free time, as utility changes. Due to the optical illusion that the vertical distance between indifference curves seems to get wider as you move from left to right, it would be good to encourage students to take a moment to check this, so they are really convinced that the vertical distance between the indifference curves is constant at each level of hours of leisure.

1. Activity type: Discussion
   Activity description: Consider the institutional arrangements around you. For example, think about an interaction between two economic actors (landlord/tenant, employer/employee, firm/customer) and then think about the institutional arrangements that govern that specific interaction. In what ways do you think the allocation of resources and final goods that you observe in daily life is influenced by those institutional arrangements? (You may want to research relevant laws in your country/region.)
   Using AI for this activity: Students select a historical case where institutional arrangements changed significantly (e.g., the end of serfdom in Europe, the abolition of slavery in the United States, the shift from communism to capitalism in Eastern Europe). They analyze how these changes impacted the production function, feasible frontier, reservation options, and surplus distribution. Example Prompt: “ChatGPT, provide an overview of the economic changes that occurred during the abolition of slavery in the USA.”

Key concept: Pareto Efficiency

Make sure the students understand why the outcome resulting from slavery in this context is Pareto efficient: under the outcome shown, no-one can be made better off without someone else being made worse off—the definition of Pareto efficiency. Once this concept is understood, separate it from other evaluation criteria: in particular, underscore the distinction between Pareto efficiency and fairness. This highlights the fact that Pareto efficiency is sometimes a very weak criterion on which to base policy decisions and points to resistance to a change in institutional arrangements.
Pareto efficiency curve (PEC): These terms do not sound technical, yet they have precise interpretations:
a) Every point that is not on the PEC is dominated by at least one point on the PEC
b) Points on the PEC are not Pareto-dominated by any other points.
The curve is vertical and linear because of the quasi-linearity assumptions on preferences. Remind students that this is a simplification, but the economics behind the PEC is general. The PEC is often referred to as the ‘contract curve’ in other texts.

1. Activity type: Discussion
   Activity description: Resistance – Case 1 shows that the outcome under forced labour is Pareto efficient. Ask students to discuss why proposals which would move away from a Pareto-efficient allocation are likely to face resistance. Can they think of any real-life examples of this kind of resistance?
   Using AI for this activity: None
2. Activity type: Exercise (asynchronous)
   Activity description: Effects of immigration – Have students read this article in The Economist about migrant labour in developed countries: https://www.economist.com/special-report/2016/09/29/needed-but-not-wanted. Activities: 1) Use the Angela-Bruno framework in the unit to analyse the possible effects of immigration on the reservation indifference curve and distribution of the surplus. 2) Evaluate the costs and benefits of stricter migration restrictions.
   Using AI for this activity: None
3. Activity type: Exercise (asynchronous)
   Activity description: Application to the gig economy – Article in The Economist about working in the gig economy vs traditional companies: https://www.economist.com/finance-and-economics/2018/10/04/worries-about-the-rise-of-the-gig-economy-are-mostly-overblown. To discuss: 1) Using the information in the article and the Angela-Bruno framework in the unit, compare the reservation indifference curve and division of the surplus of a worker in the gig economy to a worker in a traditional company. 2) To what extent are workers in traditional companies better off than workers in the gig economy?
   Using AI for this activity: None
4. Activity type: Discussion
   Activity description: Overwork and Pareto (in)efficiency – Have students read this article in the Financial Times about overwork and Pareto inefficiency: https://www.ft.com/content/b4ae605a-99ce-11e6-8f9b-70e3cabccfae. Discuss: 1) How could firms, industries or countries get stuck in a potentially inefficient habit of overwork? 2) What is meant by the term ‘productivity’? Why might increasing hours work damage productivity?
   Using AI for this activity: None

Topic 3: measuring, understanding and addressing inequality

Instructors who want to put an emphasis on environmental considerations may like to take time to work through the environmental bargaining application thoroughly. It demonstrates that the principles demonstrated by the story of Angela and Bruno are also relevant and useful in other contexts.

Key concept: Gini coefficients

Gini coefficients are a commonly used measure of inequality. This section introduces how they are calculated. The section on Operation Barga provides an example of a policy which increased inequality, thereby reducing the Gini coefficient.

1. Activity type: Exercise (asynchronous)
   Activity description: Political consequences of inequality – Have students read this Financial Times article about how income inequality in the UK affected the Brexit vote: https://www.ft.com/content/24e88c30-bc5f-11e6-8b45-b8b81dd5d080. To discuss: 1) Choose one of the graphs in the article and describe, in your opinion, the most interesting feature. 2) Explain what is meant by the Gini coefficient. Explain what the article suggests has happened to income inequality since the 1970s. (Instructors can also ask students to look up income inequality statistics for their country or a country of their choice and compare it with those in the article).
   Using AI for this activity: None
2. Activity type: Exercise (asynchronous)
   Activity description: Taxation and income inequality – Have students read these articles in The Economist discussing the effect of taxation on income inequality across countries: https://www.economist.com/graphic-detail/2019/04/13/american-inequality-reflects-gross-incomes-as-much-as-taxes; https://www.economist.com/finance-and-economics/2017/10/19/higher-taxes-can-lower-inequality-without-denting-economic-growth. Activities: 1) Choose two countries mentioned in the article and/or in the unit and suggest reasons for the observed differences in pre-tax and post-tax inequality. You may find it helpful to research the tax and benefit systems of those countries.2) Based on the information in the article and in the unit, to what extent is low post-tax inequality a result of government redistribution? Explain the challenges involved with designing a tax system that effectively reduces inequality.
   Using AI for this activity: Students participate in a role-playing simulation where they act as policymakers tasked with reducing income inequality in a virtual economy. An AI assistant provides real-time feedback on proposed policies, simulates economic outcomes, and challenges students to consider the trade-offs and unintended consequences of their decisions.
   Example Prompt:
   “ChatGPT, I’m acting as the finance minister of a country facing high income inequality and slow economic growth. I propose increasing the top marginal tax rate and investing in education and healthcare. Can you simulate the potential impacts of these policies on the economy and society over the next five years?”
3. Activity type: Data
   Activity description: Working with data visualizations – CORE Econ’s data visualizations for wealth and income are a great tool – available at https://www.core-econ.org/visualizations/ Students can construct their own “skyscraper” diagrams and compare countries according to some measures of inequality. The interface guides students through step by step while also providing flexibility so that students can explore different countries according to their interests. (Instructors who used this activity in Unit 1 can ask students to focus on using the measures of inequality to make comparisons across countries and time.)
   Using AI for this activity: None
4. Activity type: Extension
   Activity description: Learn more about inequality – For additional material on measuring and tackling inequality, instructors can refer to the following:
   1) The Economy 1.0, Unit 19 (https://www.core-econ.org/the-economy/book/text/19.html)
   2) CORE Econ’s Insight on inequality (https://www.core-econ.org/insights/a-world-of-differences/text/01.html)
   3) CORE Econ’s LabXchange course on inequality (https://www.labxchange.org/library/pathway/lx-pathway:947bd402-9d3a-40f0-bcac-31c660f34459)
   CORE Econ’s ‘Economic inequality pathway’, a learning experience assembled like a storyline, which users can go through at their own pace. It consists of slideline figures, text, and items of assessment with immediate feedback which illustrate concepts related to economic inequality.
   Each of these resources are approximately one week’s worth of reading/work.
   Using AI for this activity: Students create a personalized, self-paced learning journey on income and wealth inequality with the assistance of an AI tutor. The AI curates content from CORE Econ’s resources, including interactive modules, articles, videos, and assessments. It adapts to the student’s progress, offering explanations, quizzes, and feedback to reinforce understanding and address knowledge gaps.
   Example Prompt:
   “ChatGPT, I want to deepen my understanding of global wealth inequality and its impact on economic development. Can you create a personalized learning plan using resources from CORE Econ’s Insight on inequality and the LabXchange course? Include interactive activities and quizzes to help me test my knowledge as I progress.”

Unit 6 teaching guide

Conceptual prerequisites:

• Constrained optimisation model; Nash equilibrium

Required Building blocks:

• Section 2.2 (economic decisions: opportunity costs, and economic rents and incentives)
• Section 2.3 (comparative advantage, specialization, and markets)
• Sections 3.2-3.5 (constrained choice problems)
• Sections 4.2-4.3 (game theory and Nash equilbrium)

Building blocks in this unit:

• Section 6.6 (incomplete contracts, principals and agents)

Unit narrative

• Firms: Organizational structure and incentives (Section 6.1-6.3, 6.6)
  Separation of ownership and control
  Wage-labour contract
  Incomplete contracts; enforceable contracts
  Asymmetric information
  Principal-agent problem
• The labour market (Section 6.4)
  Labour force
  Labour market flows
  Unemployment rate
  Firm-specific assets
• Labour discipline model (Section 6.5, 6.7-6.9)
  Reservation wage; Reservation wage curve
  Employment rent
  Unemployment benefit
  No-shirking condition; No-shirking wage
• Wage-setting model (Section 6.10-6.13)
  No-shirking wage curve
  Feasible set; isoprofit curves
  Search unemployment; involuntary unemployment
  Labour market (monopsony) power
  Minimum wage
• Worker-owned cooperatives (Section 6.14)
  Cooperative firm

What’s important/difficult and how to teach it

Topic 1: Firms: Organizational structure and incentives

(Section 6.1-6.3, 6.6)
Sections 6.1-6.3 explain how the firm’s decision-making and information structures can result in misaligned incentives between owners, managers, and workers. Section 6.6 explains why the lack of relevant information and incomplete contracts result in a principal-agent problem between employer and employee.

Key concept: Separation of ownership and control

Examine the structure of firms (Figure 6.1) and the division of power between owners and managers. Follow with a discussion of information asymmetry in the context of the separation of owners (the residual claimants of profit) and managers (who are usually responsible for the performance of the firm but are not residual claimants). The relationship between the employee and the firm can be seen as an extension of the same logic.

1. Activity type: Discussion; Exercise (in-class)
   Activity description: Outsourcing responsibility – Have students watch this (5-minute) Richard Freeman video [https://youtu.be/2Zm5ZLMKhgQ] about outsourcing responsibility and the boundaries of the firm. Use the following questions to reinforce the concept of incomplete information in incomplete contracts: 1) explain what is meant by the phrase ‘you can’t outsource responsibility’ in the video. Do you agree? 2) Find one real-world example of a problem that has occurred when responsibility has been outsourced (look, for example, at recent news articles).
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Short-termism in companies – Instructors can divide students into groups and assign each group one of the following articles to read on short-termism in companies. Groups can then feed back to the class. students can read the following articles: 1) Harvard Business review article [https://hbr.org/2017/12/the-real-reasons-companies-are-so-focused-on-the-short-term]; 2) McKinsey report on the negative effects of short-termism [https://www.mckinsey.com/mgi/overview/in-the-news/the-case-against-corporate-short-termism]; 3) ESMA article on causes of short-termism, with survey evidence [https://www.esma.europa.eu/sites/default/files/trv_2020_1-short_termism_pressures_from_financial_markets.pdf].
   Using AI for this activity: Students use ChatGPT to identify and summarize recent examples of short-termism in corporations. They then compare their findings with insights from academic articles (e.g., McKinsey, HBR).
   Example Prompt:
   “ChatGPT, provide three recent examples of companies that have faced challenges due to short-termism. Summarize the issues and explain how they relate to the separation of ownership and control.”
3. Activity type: Discussion
   Activity description: Short-termism and stock prices – Students read this Financial Times article [https://www.ft.com/content/fc3d707c-3e60-11de-9a6c-00144feabdc0] and discuss the following question: Is a company’s stock price always a good indicator of the strength of its performance and strategy?
   Using AI for this activity: None
4. Activity type: Discussion
   Activity description: Shareholders and the separation of ownership and control – Have students read this article from The Economist [https://www.economist.com/business/2019/05/30/why-managers-should-listen-to-shareholders] and discuss the following: 1) With reference to the article, explain the role of shareholders in addressing the problems arising from the separation of firm ownership and control. 2) Evaluate the costs and benefits of greater shareholder participation in company decision-making.
   Using AI for this activity: None
5. Activity type: Data
   Activity description: Management practices in firms – Project 6 of Doing Economics teaches students about how economists can measure management practices in firms. Part 6.1 shows students how to calculate descriptive statistics and compare management scores across countries [https://www.core-econ.org/doing-economics/book/text/06-02.html#part-61-looking-for-patterns-in-the-survey-data]. Instructors can set a few questions for homework or an in-class exercise.
   Using AI for this activity: None
6. Activity type: Discussion
   Activity description: Causal relationship between management practices and firm performance – Students can read and discuss the results of Bloom et al. (2013) [https://www.nber.org/system/files/working_papers/w16658/ w16658.pdf], which discusses a randomised field experiment in an Indian textile factory. (Pages 9-10 describe the experiment details, and Figure 12 shows the main results).
   Using AI for this activity: None

Key concept: Wage-labour contract

Students should understand how wage-labour contracts different from “contracts” in consumption goods markets.

1. Activity type: Discussion
   Activity description: Why do firms exist? – Students read this article in The Economist article on Coase’s theory of the firm [https://www.economist.com/economics-brief/2017/07/27/coases-theory-of-the-firm]. Discuss the following questions: 1) Using the information in the article and in the unit, compare and contrast the nature of interactions in markets and in firms. 2) If markets are so good at directing resources, why do firms exist?
   Using AI for this activity: Students use ChatGPT to identify key papers related to Coase’s theory of the firm and explore their core arguments. After reading the AI-suggested summaries or excerpts from these papers, students share their interpretations. ChatGPT then provides corrective feedback to refine their understanding and connect the theories to real-world applications.
   Example Prompt:
   “ChatGPT, can you provide three academic papers or key readings related to Coase’s theory of the firm? Include brief summaries for each paper to help me understand their main arguments and relevance to the topic.
   Once I’ve read them, I’ll share my understanding of each. Could you then correct any misconceptions I might have and highlight the connections between these ideas?”

Key concept: Incomplete contracts

To explain what makes a contract ‘incomplete’, refer to the nature of the employment relationship (usually long-term, so impossible to predict all future events that may arise and include them in the contract) and the nature of the tasks (effort cannot be perfectly quantified or measured). Use real-world examples by relating to the activity in the student-facing course in which the students choose a job title. Ask them to compare the incentives of the firm and the worker and think about how the contract is incomplete. Emphasize that in an incomplete contract not all relevant information is available: firms cannot perfectly monitor each worker’s effort, and the tasks required cannot be fully specified.

1. Activity type: Game
   Activity description: The incomplete contracts game (requires instructors to log into their free CORE instructor’s account) – Instructors can download a PDF of this game [https://www.core-econ.org/experiencing-economics/instructors/book/text/50-01-other-experiments.html#incomplete-contracts] to play in class.
   Using AI for this activity: None

Key concept: Principal-agent problem

Students should understand the conflict of interest that arises between the profit-maximising employer (principal) and the effort-minimising employee (agent). Principal-agent problems arise because the relevant information is either asymmetric or non-verifiable. In the employment relationship, the employer can use employment rents as an incentive for employees to work hard (discussed in subsequent sections).

1. Activity type: Discussion
   Activity description: Voting rights and the principal-agent problem – Students read this Financial Times article [https://www.ft.com/content/ab860f60-5f5b-11e8-ad91-e01af256df68] and discuss the costs and benefits of an unequal voting rights model that gives management disproportionate control of a company.
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Dispersed shareholding in publicly-listed companies – Have students read this article from The Economist article [https://www.economist.com/business/2013/03/02/companies-moral-compasses] and answer the following: 1) To what extent is the separation of ownership and control a problem when contracts are incomplete, and how can the principal-agent relationship between owners and managers be managed well? 2) Analyse the potential costs and benefits of dispersed shareholding.
   Using AI for this activity: None

Topic 2: The labour market

(Section 6.4)
This section describes the labour market, focusing on transitions between employment and unemployment (Figure 6.3). This section also explains why the labour market is different from markets for consumption goods.
(Section 6.1-6.3, 6.6)

Key concept: Firm-specific assets

These refer to skills, networks, and friendships that are specific to an employment relationship (so value is lost to both sides if the employee leaves). Students should understand why both employer and employee benefit from a long-term employment relationship.

1. Activity type: Poll
   Activity description: What do employees value about their job? – Instructors can find employee surveys about what they value in their job and ask students to guess or rank these aspects. (Examples – CIPHR for the UK [https://www.ciphr.com/survey-infographic-the-benefits-incentives-employees-value-most] and Gallup for the US [https://www.gallup.com/workplace/389807/top-things-employees-next-job.aspx]). Instructors can also poll students on what they would value in their ideal job after graduation, and compare the results to actual employee surveys. This exercise can illustrate the importance of finding a good match between employer and employee (different people value different things in a job).
   Using AI for this activity: ChatGPT acts as an employee providing feedback on organizational policies. Students, role-playing as managers, must interpret the feedback and propose changes to improve productivity and alignment with firm goals.
   Example Prompt:
   “ChatGPT, pretend you’re an employee frustrated with the current bonus system. Explain your concerns, and I’ll propose adjustments to improve motivation and fairness.”
2. Activity type: Discussion
   Activity description: Non-compete agreements – Have students read this article from The Economist[https://www.economist.com/finance-and-economics/2018/05/17/lawmakers-are-trying-to-curb-contracts-that-make-it-harder-to-change-jobs] and discuss the following questions: 1) To what extent are relationship-specific and firm-specific assets a plausible explanation for the widespread use of non-compete agreements in America? 2) Analyse the costs and benefits of non-compete agreements on firms, workers, and the whole economy.
   Using AI for this activity: None

Key concept: Labour force; unemployment rate

This section mentions some macroeconomic concepts, but detailed explanations are left to Volume II. Figure 6.4 uses empirical data to illustrate actual labour market flows and shows how to calculate some labour market statistics (e.g., working-age population, unemployment rate) without providing definitions.

1. Activity type: Data
   Activity description: Labour market flows – Ask students to redraw Figure 6.4 using data from a different country of their choice (useful data sources include the ILO[https://ilostat.ilo.org] and the OECD websites[https://www.oecd-ilibrary.org/employment/data/oecd-employment-and-labour-market-statistics_lfs-data-en]). Students can then calculate and compare the labour market statistics and discuss possible reasons for the similarities/differences observed.
   Using AI for this activity: None

Topic 3: Labour discipline model

(Section 6.5, 6.7-6.9)
These sections represent the social interaction between employer and employee as a game, called the labour discipline model. Sections 6.7-6.8 discuss the determinants of the employee’s payoffs and decision to work or shirk, particularly the reservation wage. These sections use concepts from Unit 2 (economic rent) and Unit 4 (social interactions), though emphasis is placed on “expected” or “average” values when making decisions because players do not know exactly what will happen (e.g. how long it will take to find a job and what the pay in the new job will be).

Key concept: Reservation wage

The reservation wage gives the worker the same value as his/her reservation option (e.g., remain unemployed and continue job searching). Students should be able to identify individual and economy-wide factors that affect a worker’s reservation option (e.g. unemployment benefits). It is important to note that reservation wages differ across workers (as shown by the reservation wage curve). Students should be familiar with the equation for a worker’s reservation wage (Section 6.8).
Reservation wage curve (Figure 6.6): This curve shows wage required to employ a given number of workers and indicates the range of reservation wages of workers hired – at any point, the reservation wage of all workers hired is less than or equal to wage shown on the curve. The reservation wage curve slopes upwards because if the firm raises the wage, workers with higher reservation wages will accept a job offer and the firm can hire more workers.

1. Activity type: Data; Discussion
   Activity description: Unemployment insurance around the world – The following webpages contain information about unemployment insurance generosity in various countries: OECD (https://data.oecd.org/benwage/benefits-in-unemployment-share-of-previous-income.htm); International Labour Organization (https://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_007901/lang--en/index.htm). In groups, students could use this information to discuss how the reservation wages of workers may differ across countries and groups in society (e.g. gender, age, type of occupation).
   Using AI for this activity: Students analyze how unemployment insurance affects reservation wages across different countries. Using OECD and ILO data, they investigate factors like gender, age, and occupation. This activity helps students understand global differences in labour market policies and their impact on workers’ decisions.
   Example Prompt:
   “ChatGPT, summarize unemployment insurance policies in Germany, the US, and Japan. Compare how these policies might influence reservation wages for workers of different age groups or occupations. Highlight key similarities and differences.”

Key concept: Employment rent

The employment rent is the net benefit from the job minus the net benefit of being unemployment. Students should know that the employment rent is a type of economic rent (refer to Section 2.2). Figures 6.8a and 6.8b explain how to calculate the employment rent.

1. Activity type: Exercise (asynchronous)
   Activity description: Employment rent calculations – for additional practice, instructors could ask students to complete the Exercise 6.5 with different numbers or use different scenarios.
   Using AI for this activity: None

Key concept: Labour discipline model

The employee’s decision to put in the required effort or shirk depends on whether the no-shirking condition is satisfied (the net payoff from working hard minus the net payoff from shirking). In the Nash equilibrium of the game, the employer thus chooses the wage that exactly satisfies this condition (no-shirking wage), and the employee exerts the required effort. Instructors can refer to Sections 4.1-4.4 to remind students of the relevant concepts.
No-shirking wage: The no-shirking wage is the employee’s reservation wage plus the cost of effort plus the employment rent. Students should know that the no-shirking wage is always above the reservation wage (an important fact in subsequent sections), and be familiar with the equation (Section 6.9).

1. Activity type: Exercise (in-class)
   Activity description: Labour discipline model as a game – As a warm-up exercise, ask students to identify the 5 elements of a game (players, feasible strategies, information, sequence of play, payoffs) for the labour discipline model.
   Using AI for this activity: None
2. Activity type: Data
   Activity description: The no-shirking wage – as an extension to Exercise 6.6, ask students to draw Figure 6.9 for specific values of h, w, c, s, and w_r. Then ask them to do comparative statics by changing the values of these variables and explain (using the diagram and intuition) how the no-shirking wage changes.
   Using AI for this activity: None
3. Activity type: Discussion
   Activity description: Employee monitoring technologies – Exercise 6.8 links to two studies on the effects of employee monitoring technologies. Instructors can supplement this exercise with this article from The Economist on labour-saving technologies [https://www.economist.com/finance-and-economics/2018/03/01/labour-monitoring-technologies-raise-efficiency-and-hard-questions].
   Using AI for this activity: None

Topic 4: Wage-setting model

(Section 6.10-6.13)
These sections use the constrained optimization framework of Unit 3 to model the firm’s wage-setting decision. The no-shirking wage curve represents the firm’s feasible set, isoprofit curves represent the firm’s preferences, and the firm’s profit-maximising choice is at the tangency of the two. Section 6.13 uses this framework to show how a minimum wage affects the firm’s profit-maximising choice.

Key concept: No-shirking wage curve (Figure 6.12)

This curve is derived from the labour discipline model (Section 6.9) and represents the firm’s feasible set. Students should understand why the no-shirking wage is above the reservation wage and why the reservation wage curve cannot be the firm’s feasible set (all employees whose reservation wage is between the no-shirking wage curve and reservation wage curve will accept the job offer but shirk). Figure 6.19 illustrates how the minimum wage affects the no-shirking wage curve.
Search unemployment; Involuntary unemployment: Students should know the difference between these two sources of unemployment. Search unemployment (also known as frictional unemployment) arises from search and matching costs. Involuntary unemployment arises from the labour discipline problem because firms must set wages to provide incentives for effort. Figure 6.17 shows how to find the size of involuntary unemployment in the wage-setting diagram.
Labour market power: Section 6.12 discusses two forms of power that firms have – labour market (monopsony) power (the firm’s power to hold down wages by restricting employment), and “power over others” (using the threat of employment termination to induce the required effort). Students should understand this distinction and how these two forms of power are related.

1. Activity type: Discussion
   Activity description: The “Great Resignation” – Instructors could turn Exercise 6.10 into a group discussion by dividing students into groups and assigning each group one of the three articles to complete the exercise on. For a longer assignment, instructors could ask students to choose a country and find articles to compare the labour market effects of the COVID-19 pandemic with that of the US (described in Exercise 6.10).
   Using AI for this activity: None
2. Activity type: Exercise (asynchronous)
   Activity description: Productivity during the global financial crisis – Exercise 6.11 asks students to draw diagrams to illustrate the results from an economic study. As an extension, instructors can ask students to compare the labour market effects of the global financial crisis and the COVID-19 pandemic (linking Exercises 6.10 and 6.11). Students can read the following articles for ideas: Shibata (2021) [https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9183946/] and Verick et al. (2021) [https://doi.org/10.1111/ilr.12230]. These articles also discuss the effects of both crises on inequality.
   Using AI for this activity: None
3. Activity type: Discussion
   Activity description: The UK’s national living wage – Have students read this article from The Economist on working poverty in the UK [https://www.economist.com/britain/2016/06/25/when-a-job-is-not-enough] and analyse (using an appropriate diagram) the likely effects of the national living wage on employment rents, employment, and inequality.
   Using AI for this activity: Students analyze the effects of the UK’s National Living Wage on inequality, employment rents, and labour market outcomes. Using AI, they develop diagrams and case studies to illustrate the policy’s impact.
   Example Prompt:
   “ChatGPT, analyze the impact of the UK’s National Living Wage on labour market outcomes. Explain how it affects employment rents and inequality, using diagrams and real-world examples to support your analysis.”

Topic 5: Worker-owned cooperatives

(Section 6.14)
This section introduces worker-owned cooperatives (cooperative firms) as another way of organizing labour and provides comparisons with traditional firms (Sections 6.1-6.3).

Key concept: Cooperative firm

Students should know how the organizational and incentive structures of cooperative firms differ from those of traditional firms (Sections 6.1-6.3).

1. Activity type: Exercise (asynchronous)
   Activity description: Role of cooperatives in the economy – As an extension to Exercise 6.13, instructors can ask students to research the prevalence and characteristics of worker-owned cooperatives in a country/countries of their choice, and produce a short presentation or report.
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Incentives in cooperative firms – Have students read this Financial Times article on John Lewis-style partnerships and the future of firms [https://www.ft.com/content/30ca497e-438a-11e1-9f28-00144feab49a]. Discussion question: Why have stock incentive schemes in the financial industry not historically resulted in the same successful alignment of interests as the John Lewis partnership model?
   Using AI for this activity: None
3. Activity type: Discussion
   Activity description: Cooperative firms vs traditional firms – Have students read this article from The Economist on a cooperative firm in Spain [https://www.economist.com/business/2013/11/09/trouble-in-workers-paradise]. Discussion questions: 1) With reference to the article and the unit, evaluate the extent to which the cooperative firm business model is sustainable and beneficial for workers. 2) Discuss the benefits and risks of being a worker in a cooperative firm, compared to being a worker in a traditional firm.
   Using AI for this activity: None
4. Activity type: Data
   Activity description: Who owns the firms? – Exercise 6.8 from CORE’s Economy, Society, and Public Policy eBook [https://www.core-econ.org/espp/book/text/06.html#exercise-68-using-excel-who-owns-the-firms] gets students to compare the characteristics of firms and firm owners in different countries, using data from the World Bank’s Enterprise Survey.
   Using AI for this activity: None
5. Activity type: Extension
   Activity description: The gig economy – Instructors may want to discuss this alternative way of organizing labour. Section 6.14 of Economy, Society, and Public Policy provides an introductory discussion [https://www.core-econ.org/espp/book/text/06.html#614-another-kind-of-business-organization-the-gig-economy]. Students can also read this Financial Times article on worker monitoring in the gig economy [https://www.ft.com/content/88fdc58e-754f-11e6-b60a-de4532d5ea35] and compare it with worker monitoring in traditional firms.
   Using AI for this activity: None

Unit 7 teaching guide

Conceptual prerequisites:

• Constrained optimisation model; Nash equilibrium

Required Building blocks:

• Section 2.2 (economic decisions: opportunity costs, and economic rents and incentives)
• Sections 3.2-3.5 (constrained choice problems)
• Sections 4.2-4.4 (game theory and Nash equilbrium)
• Section 4.5 (Pareto efficiency)

Building blocks in this unit:

• Section 7.4 (the cost function; marginal and average cost)
• Section 7.5 (demand, elasticity and revenue)
• Section 7.7 (gains from trade: consumer and producer surplus)

Unit narrative

• Profit maximisation (Section 7.1-7.4, 7.6)
  Cost function: Total costs, average costs, marginal costs, fixed costs
  Profit: Economic profit vs normal profit
  Constrained choice problem: Isoprofit curves; Demand curve
  Economies of scale/increasing returns; diseconomies of scale/decreasing returns, constant returns
  Network economies of scale
  Price markup, profit margin
• Price elasticity of demand
  (Section 7.5)
  Price elasticity of demand: Formulae and interpretation
  Differentiated product
• Gains from trade (Section 7.7)
  Gains from trade/Gains from exchange
  Consumer surplus; Producer surplus; Deadweight loss
  Price discrimination
• Market power and strategic-price setting (Section 7.8, 7.10-7.11)
  Market power; Market share
  Monopoly; Natural monopoly
  Model of strategic price-setting
• Influencing market power
  (Section 7.9, 7.12)
  Advertising; Innovation
  Competition policy/antitrust policy

What’s important/difficult and how to teach it

Topic 1: Profit maximization

(Section 7.1-7.4, 7.6)
These sections use the constrained choice framework to model a price-setting firm’s choice of price (and quantity). Isoprofit curves represent the firm’s preferences, the demand curve represents the firm’s constraints, and the profit-maximising choice is characterized by the MRS=MRT condition. (Section 7.6 demonstrates the equivalence between MRS=MRT and MR=MC). Section 7.3 explains how and why a firm’s cost function (a determinant of its profits and the shape of its isoprofits) may vary with the firm’s size.

Key concept: Cost function (total costs, average costs, marginal costs, fixed costs)

Students should understand the formula for the total cost (fixed costs + variable costs) and how to derive average costs and marginal costs from a firm’s total cost function. Note that both examples from this unit (Cheerios and Beautiful Cars) assume constant marginal cost because it is the firm’s long-run cost function, though instructors may note that marginal cost can be increasing in the short-run while some inputs such as the stock of equipment are fixed.

1. Activity type: Data
   Activity description: Cost functions for a university – Exercise 7.2 gets students to use Excel to plot the average and marginal cost functions of a university. As an extension, instructors could ask students to suggest how cost functions might differ for other types of universities, different degree programmes, and their local country (the data in Exercise 7.2 only considers public universities in the US).
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: The cost structure of MOOCs – Have students read this article in The Economist about cost structures of MOOCs: https://www.economist.com/finance-and-economics/2014/02/08/massive-open-online-forces. Compare the cost structures of MOOCs and traditional courses offered by a university. (Instructors can refer students to Exercise 7.2 for an example of cost structures for traditional university courses.)
   Using AI for this activity: Students use an AI assistant to analyze the cost functions of real-world companies. By selecting a specific company (e.g., a manufacturing firm, a tech company, or a service provider), students research and model the company’s total cost function, including fixed and variable costs. They then derive average and marginal cost functions and discuss how these costs influence the company’s pricing and output decisions.
   Example Prompt:
   “ChatGPT, help me analyze the cost structure of Tesla Inc. Can you provide information on Tesla’s fixed costs, variable costs, and how these contribute to their total cost function? Also, help me derive the average and marginal cost functions based on this information. Plot the graph and highlight these clearly.”

Key concept: Economies/diseconomies of scale; constant returns

Economies of scale is a term used to describe the technological advantages of large-scale production. There can also be cost or demand advantages (network economies of scale). Students should be familiar with the definition and the underlying intuition.

1. Activity type: Discussion
   Activity description: Identifying economies of scale – Have students read this Financial Times article on diseconomies of scale: https://www.ft.com/content/863409bc-5fca-11e0-a718-00144feab49a. Discuss the empirical evidence for diseconomies of scale.
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Economies of scale in the shipping industry – Have students read this article in The Economist about economies of scale in shipping industry: https://www.economist.com/business/2011/11/12/economies-of-scale-made-steel. To discuss: 1) Give two or three examples of the economies of scale that large shipping companies can benefit from. 2) Do you think that large shipping companies will suffer from diseconomies of scale due to growing further or merging?
   Using AI for this activity: Students use an AI assistant to explore economies and diseconomies of scale through AI-generated case studies of various industries. They examine how firms benefit from increasing scale and the potential drawbacks when firms become too large.
   Example Prompt:
   “ChatGPT, can you generate a case study of a pharmaceutical company experiencing economies of scale? Include specific examples of cost advantages and discuss any potential diseconomies of scale the company might face as it grows larger.”

Key concept: Isoprofit curves

Isoprofit curves are the firm’s “indifference curves” since we assume the firm only cares about profits. Conveying the logic of the isoprofit curve is easiest in the constant cost case: given the cost, if the firm lowers the price, how many more units must it sell to keep total profits unchanged? A simple intuitive explanation, such as (high price, low quantity) gives the same profit as (low price, high quantity) can also help. Work through the steps in Figure 7.2b to illustrate how to draw isoprofit curves. Students may find the 3D representation in Figure 7.2a helpful for understanding this concept.
Profit maximization: Section 7.2 approaches profit maximization using the MRS = MRT tangency condition (Unit 3), while Section 7.6 applies a different but equivalent way of thinking about profit maximization, using marginal revenue and marginal cost. Work through the steps in Figures 7.4a and 7.4b to explain the intuition behind the MRS = MRT condition. Figure 7.18 shows the equivalency between MRS = MRT and MR = MC.

1. Activity type: Exercise (asynchronous); Exercise (in-class)
   Activity description: Comparative statics – Exercise 7.1 asks students to use the profit maximization diagram (Figure 7.4a) to illustrate the effects of some exogenous changes. As an extension to Exercise 7.1, instructors can ask students to brainstorm factors that affect each element in the diagram (isoprofits, demand curve).
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Price-setting strategies of online firms – Have students read this article from The Economist on how online firms set their prices: https://www.economist.com/finance-and-economics/2019/08/08/prices-for-many-goods-do-not-move-the-way-economists-think-they-should. Discuss the similarities and differences between price setting by real-world firms and firms in textbooks (as described in the article).
   Using AI for this activity: None
3. Activity type: Exercise (asynchronous); Exercise (in-class)
   Activity description: Beautiful Cars in the real world – Have students read this article from The Economist on the profits of actual car brands: https://www.economist.com/business/2019/09/12/porsche-is-small-but-highly-lucrative. 1) Compare the isoprofit curves of a luxury car to those of a non-luxury car. 2) Evaluate the use of cost sharing across different vehicle brands in a company.
   Using AI for this activity: None
4. Activity type: Discussion
   Activity description: Profit-maximisation for online music providers – Have students read this article in The Economist about the different cost structures of online music providers: https://www.economist.com/finance-and-economics/2009/10/22/e-pluribus-tunum. 1) Discuss the constraints in online music providers’ profit maximisation problem. 2) Discuss the trade-offs faced by online music providers when choosing a pricing scheme. 3) Which pricing scheme mentioned in the article do you think firms should choose?
   Using AI for this activity: None

Topic 2: Price elasticity of demand

(Section 7.5)
This section defines price elasticity of demand and explains why this concept is important for firms.

Key concept: Price elasticity of demand (PED)

This concept can be confusing to some students because it is a measure of proportional change and has no units. Motivate them by demonstrating how useful the measure can be. Many students believe that the elasticity is the same at any point along a straight-line demand curve because the slope remains constant. Use Figure 7.12 in class or get the students to do the calculations to understand that the elasticity is different along different points of a linear demand curve. Students should be aware of the equivalent formulae used to calculate PED and their interpretation (Figure 7.11).

1. Activity type: Poll
   Activity description: Guessing the price elasticity of demand – Find elasticities of demand for common goods (e.g. gasoline, restaurant meals, airline tickets) and get students to guess the ranking (least elastic to most elastic) and explain why. Here is one example covering a wide range of goods: https://scholar.harvard.edu/files/alada/files/price_elasticity_of_demand_handout.pdf
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Identifying pricing strategies – Have students read this Financial Times article on various types of pricing strategies used by firms: https://www.ft.com/content/4f7add7e-4126-11da-a208-00000e2511c8. Identify the various pricing strategies mentioned in the article and use concepts from this unit (e.g. price elasticity of demand) to explain the firm’s decision.
   Using AI for this activity: None
3. Activity type: Exercise (asynchronous)
   Activity description: Identifying pricing strategies (follow-up activity) – As a practical exercise, instructors could ask students to find examples of these pricing in their local neighbourhood or online (e.g. comparing the price of the same brand of coffee in the train station vs the supermarket).
   Using AI for this activity: None
4. Activity type: Discussion
   Activity description: Pricing tactics – Have students read this article in The Economist about pricing tactics used by companies: https://www.economist.com/business/2013/07/27/thinking-twice-about-price. 1) Evaluate the costs and benefits of having a clearly defined pricing strategy. 2) How have companies ‘gotten away’ with charging more for their products?
   Using AI for this activity: None
5. Activity type: Data
   Activity description: Elasticity along a linear demand curve – Students can try this EconGraphs simulation: https://www.econgraphs.org/graphs/concepts/elasticity/demand_elasticity/constant_slope, which shows how elasticity varies along a demand curve, along with the equation to calculate PED.
   Using AI for this activity: Students use an AI assistant to understand how price elasticity of demand varies along different types of demand curves (linear, constant elasticity, etc.). Through interactive graphs and calculations, they explore why elasticity changes along a linear demand curve and remains constant along a logarithmic demand curve.
   Example Prompt:
   “ChatGPT, help me understand how price elasticity of demand changes along a linear demand curve versus a constant elasticity demand curve. Can you provide graphs and explanations to illustrate these differences?”

Topic 3: Gains from trade

(Section 7.7)
This section explains how the interaction between firms and consumers results in gains from trade (surplus), and discusses how the firm’s market power (its ability to influence the price in its own favour) affects the division of market surplus.

Key concept: Gains from trade/Gains from exchange

This unit links economic rents to consumer surplus and producer surplus. Consumer and producer surplus add up to the total surplus, which results from the interaction between the firm and its customers and provides a measure of the gains from trade.
Consumer surplus; Producer surplus: Students should be aware of the caveats with interpreting consumer and producer surplus. For example, students often equate producer surplus with profit, but the two concepts are distinct as profit accounts for fixed costs (Figure 7.19).
Deadweight loss: This model also provides a very good opportunity to highlight that the outcome of the firm’s profit-maximization decision is an equilibrium, but not a Pareto-efficient one. The inefficiency here is related to power and the rules of the game. The DWL arises because the firm must charge a single price.

1. Activity type: Discussion
   Activity description: Consumer surplus on the Internet – Have students read this article in The Economist on the consumer surplus generated by the internet: https://www.economist.com/free-exchange/2013/03/11/measuring-consumer-surplus-online. To discuss: 1) How useful is the concept of consumer surplus in practice, given the difficulties in measurement discussed in the article? 2) Discuss the challenges involved with measuring the consumer surplus of online platforms. Do you agree with the estimate given in the article?
   Using AI for this activity: Students participate in a simulation where they act as managers of a firm making pricing decisions in response to changes in demand elasticity. An AI assistant provides different market scenarios, and students adjust prices accordingly to maximize total revenue. The AI then provides feedback on the outcomes on consumers and revenue based on their decisions.
   Example Prompt:
   “ChatGPT, let’s simulate a scenario where I am setting prices for a new smartphone. Provide me with information on the demand elasticity at different price points, and I’ll decide on the optimal price to maximize revenue. After I make my pricing decision, show me the results on all participants and suggest any adjustments.”

Key concept: Price discrimination

Instructors can refer to Exercise 7.3 (perfect price discrimination) as a scenario where the profit-maximizing outcome is also Pareto efficient. These aspects are rarely discussed in this way in other texts. Figure 7.20 is useful to dispel the common confusion among students that a situation is Pareto efficient because the firm is maximizing profits.

1. Activity type: Exercise (asynchronous); Exercise (in-class)
   Activity description: Perfect price discrimination – Exercise 7.3 gets students to calculate surplus under perfect price discrimination. As a supplement to this exercise, instructors could ask students to read the following articles and discuss the extent to which firms can charged personalized prices in practice: Ofcom, “Personalised pricing for communications” (https://www.ofcom.org.uk/__data/assets/pdf_file/0033/199248/personalised-pricing-discussion.pdf); OECD “Personalised pricing in the digital era” (https://one.oecd.org/document/DAF/COMP(2018)13/en/pdf).
   Using AI for this activity: None

Topic 4: Market power and strategic price-setting

(Section 7.8, 7.10-7.11)
Section 7.8 explains how producers of differentiated products can enjoy market power, enabling them to set price above marginal cost. Section 7.10 uses game theory concepts (Unit 4) to model the strategic price-setting behaviour of two firms and explains how the type of game (coordination game vs prisoners’ dilemma) depends on the degree of consumers’ price sensitivity. Section 7.11 explain how a firm’s cost structure can be a source of market power: decreasing long-run average costs can result in natural monopolies.

Key concept: Market power; Market share

Market power is defined as the ability to influence the price in one’s own favour. It is a special case of bargaining power, a concept discussed in Unit 5. Market share (the firm’s share of total market quantity or revenue) is a common measure of market power. Students should understand the relationship between price markups and market power (both the intuition and the equation in Section 7.8).
Monopoly: The unit presents monopoly as a special case of price-setting firms (a single firm supplies the entire market).

1. Activity type: Discussion
   Activity description: Monopoly power – Have students read this Financial Times article on the consequences of monopoly power: https://www.ft.com/content/b62b46cc-216d-11e4-b145-00144feabdc0. Discuss: To what extent does the empirical evidence in the article support the theoretical concerns about monopolies discussed in this unit?
   Using AI for this activity: None

Key concept: Natural monopoly

When there are very large economies of scale in an industry (specifically, decreasing long-run average costs, a single firm can supply the whole market at lower average cost than two firms. Section 21.4 (The Economy 1.0) provides a discussion and diagram of the TC, MC, and AC for this case.

1. Activity type: Extension
   Activity description: Winner-take-all competition – Section 21.4 of The Economy 1.0 (https://www.core-econ.org/the-economy/book/text/21.html#214-economies-of-scale-and-winner-take-all-competition) explains the cost structure that gives rise to natural monopolies, with applications to knowledge-intensive innovation.
   Using AI for this activity: None
2. Activity type: Exercise (in-class); Exercise (asynchronous)
   Activity description: Examples of natural monopolies – Exercise 7.5 asks students to research examples of natural monopolies and how/why they have arisen. This exercise can also be a quick think-pair-share to get students thinking about the concept of natural monopoly.
   Using AI for this activity: Students use an AI assistant to research and analyze industries that exhibit characteristics of a natural monopoly due to their cost structures. They examine why decreasing long-run average costs can lead to natural monopolies and the implications for market power and regulation.
   Example Prompt:
   “ChatGPT, help me understand why the electricity industry is often considered a natural monopoly. What features of its cost structure lead to decreasing long-run average costs? Discuss the implications for market power and the role of regulation in this industry.”
3. Activity type: Exercise (asynchronous)
   Activity description: Natural monopoly in the water industry – Have students read this Financial Times article on the UK water industry: https://www.ft.com/content/1c017e60-9eae-11e7-8cd4-932067fbf946. 1) Discuss the extent to which the water industry is a natural monopoly. 2) Have students research the water industry in their country and compare it with that of the UK.
   Using AI for this activity: None
4. Activity type: Discussion
   Activity description: Natural monopoly in the driverless car market – Have students read this article in The Economist about driverless car market: https://www.economist.com/finance-and-economics/2018/06/07/the-market-for-driverless-cars-will-head-towards-monopoly. Discuss: 1) To what extent is the market for driverless cars a natural monopoly? 2) What kinds of economies of scale do driverless car companies benefit from? Explain whether or not a monopoly in driverless cars is necessarily a bad thing.
   Using AI for this activity: None

Topic 5: Influencing market power

(Section 7.9, 7.12)
These sections outline various ways that firms can influence their market power, some of which are considered anti-competitive. Section 7.9 discusses the role of advertising and innovation. Section 7.12 focuses on how competition authorities can use antitrust policy to regulate such behaviour.

Key concept: Advertising and innovation

Students should understand how firms use these methods to differentiate their products from those of their competitors. Section 7.9 contains some examples.

1. Activity type: Extension
   Activity description: The economics of innovation – Unit 21 of The Economy 1.0 (https://www.core-econ.org/the-economy/book/text/21.html#introduction) uses familiar frameworks (game theory, constrained choice problems) to explore firms’ incentives to innovate and policies that can encourage innovation.
   Using AI for this activity: None

Key concept: Competition policy/Antitrust policy

Instructors can use the surplus analysis in Section 7.7 to motivate the role of competition authorities (protect consumer surplus and maintain the wider benefits from competition). Students should be aware of ways that firms can influence rivalry (limiting access to production inputs or access to consumers, merging with other firms, collusion, innovation) and price elasticity of demand (advertising).

1. Activity type: Exercise (asynchronous)
   Activity description: Competition policy in digital markets – Exercise 7.6 asks students to consider features of digital markets that may pose challenges to regulators. As an extension, instructors can ask students to think about how the frameworks in the unit (cost structure, profit-maximisation problem) for firms in digital markets differ from those of traditional firms.
   Using AI for this activity: None
2. Activity type: Poll
   Activity description: What is anticompetitive behaviour? – To introduce the topic and get students thinking about what kinds of behaviour are considered anticompetitive, instructors can use this quiz (for the UK): https://form.typeform.com/to/MQJ1s0?typeform-source=maxcma.typeform.com (or find an alternative for their country).
   Using AI for this activity: None
3. Activity type: Exercise (in-class)
   Activity description: Types of anticompetitive behaviour – Have students read some case studies of anticompetitive behavior (e.g. the UK government has a webpage of case studies: https://www.gov.uk/government/collections/business-cartels-case-studies; instructors could find similar webpages for their own country). Or, have the students first brainstorm ways that firms behave anti-competitively, then find a case study as an example.
   Using AI for this activity: Students use an AI assistant to research famous antitrust cases and understand how competition authorities regulate anti-competitive behavior. They examine the legal and economic arguments involved and discuss the effectiveness of competition policy in promoting market efficiency and consumer welfare.
   Example Prompt:
   “ChatGPT, help me research the antitrust case against Microsoft in the late 1990s. What were the main anti-competitive behaviors it was accused of, and how did the competition authorities address them? Discuss the impact of this case on the software industry and consumers.”
4. Activity type: Discussion
   Activity description: Debate on monopolies in digital markets – Have students discuss their opinions on this prompt: Eric Schmidt (ex-CEO of Google) was once asked if Google was a monopoly and if so, should it be regulated or broken up. His answer: “Our product is free to the consumer. We welcome any competitors.” Some additional questions for discussion: How convincing do you find Schmidt’s answer? How do you think regulators should handle Google? How does the analysis covered in the Unit differ and what new issues arise for regulators?
   Using AI for this activity: Students engage in a structured debate on whether large digital platforms represent monopolies and if their market power is beneficial or harmful to consumers and society. An AI assistant helps them develop arguments, understand different perspectives, and consider regulatory responses.
   Example Prompt:
   “ChatGPT, I’m preparing for a debate on whether large digital platforms like Google are monopolies and whether they should be regulated or broken up. Can you help me develop arguments for both sides and provide examples to support each position?”
5. Activity type: Discussion
   Activity description: Legal frameworks for anti-competitive behaviour – Have students read this article in The Economist about the problems faced by competition authorities: https://www.economist.com/technology-quarterly/2018/11/15/regulators-across-the-west-are-in-need-of-a-shake-up. Discuss: 1) To what extent are current legal frameworks related to anti-competitive behaviour fit for purpose? 2) Discuss the challenges faced by competition authorities in identifying and punishing anti-competitive behaviour.
   Using AI for this activity: None

Unit 8 teaching guide

Conceptual prerequisites:

• Unit 7
• Game theory and Nash equilibrium; Pareto efficiency; Incomplete contracts

Required Building blocks:

• Section 2.2 (economic decisions: opportunity costs, and economic rents and incentives)
• Sections 4.2-4.3 (game theory and Nash equilbrium)
• Section 4.5 (Pareto efficiency)

Building blocks in this unit:

• None

Unit narrative

• Model of price-taking buyers and sellers
  (Section 8.1-8.4)
  Willingness to accept; reservation price
  Firm’s supply curve; Market supply curve
  Market demand curve
  Excess demand; Excess supply
  Market-clearing price; Equilibrium price
  Competitive equilibrium
• Perfect competition
  (Section 8.10-8.11)
  Perfectly competitive market
  Law of One Price
• Gains from trade (Section 8.5)
  Consumer surplus
  Producer surplus
  Pareto efficiency
• Comparative statics (Section 8.6)
  Exogenous shocks to supply and demand
  Disequilibrium rents
  Market equilibration through rent-seeking
• Short-run and long-run equilibrium
  (Section 8.7)
  Supply in the short run and the long run
  Opportunity cost of capital; costs of entry
  Economic profit; Normal profit
• Surplus analysis of policies
  (Section 8.12-8.13)
  Taxation; tax incidence
  Rent ceiling
• Cartels: Market outcomes and competition
  (Section 8.8-8.9)
  Cartel (e.g. OPEC)
  Barriers to entry
  Coordination game; Prisoners’ dilemma

What’s important/difficult and how to teach it

Topic 1: Model of price-taking buyers and sellers

(Section 8.1-8.3, 8.6)
These sections build a model of price-taking buyers and sellers, focusing on how the interactions between buyers and sellers can lead to market equilibrium. Besides characterizing the equilibrium (Section 8.3), the unit also discusses out-of-equilibrium dynamics following exogenous shocks to supply and demand (Section 8.6), explaining in detail how rent-seeking behaviour results in movement from the old equilibrium to the new one. Students should understand the importance of prices as messages.

Key concept: Market-clearing price; equilibrium price

In an equilibrium the price satisfies three properties: a) it is such that consumers maximize utility, given their own constraints; b) it is such that firms maximize profits, given demand constraints; and c) markets clear.
Competitive equilibrium: Students should understand why the competitive equilibrium is a Nash equilibrium – given what all other actors are doing (trading at the equilibrium price), no actor can do better than to continue what he or she is doing (also trading at the equilibrium price). Figure 8.4 explains in detail why other prices cannot result in market equilibrium.

1. Activity type: Discussion
   Activity description: Prices as messages – Have students read the Great Economists box on Hayek (Section 8.1) and watch this 5-minute animated version of Hayek’s comic strip (https://www.youtube.com/watch?v=mkz9AQhQFNY). Use the information in the video and Great Economists box to explain why Hayek thought price mechanisms were important for markets to function well (compared to centralized planning).
   Using AI for this activity: None
2. Activity type: Poll
   Activity description: Estimating supply and demand curves – Choose an everyday good (e.g. a secondhand textbook) and ask students to indicate their willingness to pay and willingness to accept for one unit of that good. (For a quick poll you could ask students to simply report a number; or present various amounts and ask students if they would/would not be willing to purchase/sell the good at that price). Use this information to derive the class’s supply and demand curves for that good.
   Using AI for this activity: None
3. Activity type: Discussion
   Activity description: Sellers as price-takers – Combine Exercises 8.1 and 8.2 into an in-class exercise. Instead of a used car, ask students to pick an everyday good, analyse sellers’ potential selling strategies for that good (e.g. where to sell and what price to charge).
   Using AI for this activity: None
4. Activity type: Discussion
   Activity description: Price guarantees and price-taking behaviour – Have students read this article in The Economist on price guarantees: https://www.economist.com/finance-and-economics/2015/02/12/guaranteed-profits. Discussion questions: Compare and contrast the potential effects of price guarantees and price discrimination. To what extent can we consider firms that offer price guarantees as ‘price takers’?
   Using AI for this activity: None
5. Activity type: Discussion
   Activity description: Say’s law – Have students read this article in The Economist on how supply can create its own demand: https://www.economist.com/the-economist-explains/2017/09/20/how-supply-can-create-its-own-demand. To discuss: To what extent do you think Say’s law (supply creates its own demand) holds in real-world economies?)
   Using AI for this activity: None
6. Activity type: Game
   Activity description: Reaching competitive equilibrium – Play this game from Experiencing Economics to help students understand how the actions of buyers and sellers help the market reach competitive equilibrium: https://www.core-econ.org/experiencing-economics/instructors/book/text/04.html. (Instructors need to create a free account to access the teaching resources). The game has three scenarios – students only need to play scenario 1 (a simple “trading-pit” experiment).
   Using AI for this activity: Students play an AI-supported interactive game that simulates a market where buyers and sellers engage in transactions to reach competitive equilibrium. The AI acts as the game facilitator, guiding the simulation, keeping track of transactions, and providing real-time feedback on market dynamics.
   Example Prompt:
   “ChatGPT, let’s play a market simulation game where students act as buyers and sellers of a commodity, such as wheat. You will facilitate the game, manage offers and bids, record transactions, and help us observe how the market moves toward equilibrium.”

Key concept: Firm’s supply curve

This unit uses a step function rather than a continuous function and assumes that firms have capacity constraints. Marginal costs are constant until the capacity constraint, after which they immediate increase to a higher value (Figure 8.8). Students should understand why the marginal cost curve is the firm’s supply curve.
Market supply curve: Students should understand that the continuous market supply curve typically shown in supply-demand diagrams approximates the step function that combines the individual firm supply curves (which are step functions). Figures 8.9 and 8.10 explain the aggregation process in detail; students should know how to derive the market supply curve from the individual firm supply curves.

1. Activity type: Exercise (in-class); Exercise (asynchronous)
   Activity description: From firm to market supply – Question 8.5 asks students to consider two types of firms, each with different marginal costs. To practice deriving the market supply curve from the individual firm supply curves, ask students to use the diagram in this question to draw the market supply curve under different assumptions (for example, for a given number of each type of firm in the market) or different numbers.
   Using AI for this activity: Students use an AI assistant to practice deriving the market supply curve from individual firm supply curves with different marginal costs. The AI guides students through the process of aggregating individual supply curves, exploring how varying numbers of each type of firm affect the overall market supply. This activity reinforces understanding of how individual firm behavior contributes to market outcomes.
   Example Prompt:
   “ChatGPT, we’re working on deriving the market supply curve from individual firm supply curves. There are two types of firms: Type A with a marginal cost of $5 and Type B with a marginal cost of $8. Can you help us combine these to create the market supply curve under different scenarios, such as having 10 of each firm versus 15 Type A and 5 Type B firms?”
2. Activity type: Exercise (asynchronous); Exercise (in-class)
   Activity description: Demand for commodities – Have students read this article from The Economist on growing Chinese demand for commodities: https://www.economist.com/special-report/2011/09/22/crowded-out. Questions: 1) Use the firm-level and market-level supply model to explain the effect of Chinese demand for raw materials. 2) Use appropriate diagrams to analyse and compare the effects of a rise in commodity prices on developing and advanced economies.
   Using AI for this activity: None

Key concept: Exogenous shocks to supply and demand

Disequilibrium is modelled initially as an exogenous change that shifts the supply or demand curves. The focus is then on endogenous changes within the model which restore or move the economy back toward equilibrium. This is a useful framework in which to familiarize students with the use of these important terms. Distinguish between endogenous changes (when the x-axis or y-axis variable changes, we move along the curve) and exogenous changes (when a variable that is not on either axis changes, we shift the entire curve). Emphasize that a shock is called exogenous because our model cannot explain it; we use the model to study its consequences, not its causes.
Market equilibration through rent-seeking: Equilibrium is not a state that markets are permanently in. Prices contain information that signal market participants to behave in certain ways. The behavior of the market participants determines whether, when, and how the market gets to a stable competitive equilibrium. Work through the steps in Figures 8.14 and 8.15 to help students understand adjustment process.

1. Activity type: Data
   Activity description: Price shocks and revolutions – Have students complete Exercise 8.5 as a homework assignment. Instructors can use this opportunity to teach students about different types of charts and the principles of clear data visualization.
   Using AI for this activity: None
2. Activity type: Data
   Activity description: Demand and supply curves – Project 7 of Doing Economics gets students to work with real price and quantity data (the US market for watermelons, 1930-1951) in either Excel or R. During this time, there was an exogenous shock (WWII) to watermelon supply. Part 1 of the project gets students to plot supply/demand curves for watermelons before and after the shock. It can be used as a homework assignment or in-class activity (suitable for a 1-hour tutorial). For more technical courses, instructors can also cover Part 2 (interpreting the coefficients of estimated supply/demand curves, understanding how exogenous supply/demand shocks can help researchers identify the supply/demand curve).
   Using AI for this activity: None
3. Activity type: Exercise (asynchronous)
   Activity description: The market for pork – Have students read this article from The Economist on pork prices in China: https://www.economist.com/finance-and-economics/2019/09/12/soaring-pork-prices-hog-headlines-and-sow-discontent-in-china. Question: Use the supply and demand model to explain the changes in the price of pork discussed in the article, as well as the possible outcome of measures taken to increase supply.
   Alternatively, instructors can find a recent example from their country and ask students to complete a similar exercise.
   Using AI for this activity: None
4. Activity type: Exercise (in-class); Exercise (asynchronous)
   Activity description: The market for quinoa – To complement the discussion in Section 8.6, have students read this article from The Economist on quinoa: https://www.economist.com/the-economist-explains/2016/05/24/why-the-price-of-quinoa-has-fallen. Question: Use the supply and demand model to illustrate the changes in the price of quinoa discussed in the article.
   Using AI for this activity: Students use an AI assistant to perform a surplus analysis of the quinoa market, focusing on how changes in supply and demand affect prices. After reading the article, the AI helps students apply the supply and demand model to explain price fluctuations, analyze consumer and producer surplus, and discuss the potential impact of government interventions like rent control.
   Example Prompt:
   “ChatGPT, we’ve read an article about the rising price of quinoa due to increased global demand. Can you help us use the supply and demand model to explain these price changes? Also, assist us in conducting a surplus analysis to understand the effects on consumers and producers.”
5. Activity type: Game
   Activity description: Fish market experiment – This game from ClassEx [https://econclassexperiments.com/experiments/fishmarket/] teaches students to distinguish between shifts of a supply/demand curve from movements along the curve, comparative statics (supply curve shift in a hypothetical fishing market), and the concept of sunk costs. Note: Instructors need to register for a free account to access the game, and request accounts for their students.
   Using AI for this activity: None

Topic 2: Short-run and long-run equilibrium in competitive markets

(Section 8.7)
This section explains how changes at the individual firm level affect market supply in the short-run and the long-run. An understanding of the individual firm diagram (Figure 8.16) is crucial.

Key concept: Definition of short run and long run

An important distinction between long-run and short-run equilibrium is that in the short run some variables are fixed while in the long run, all variables are free to adjust (including firm exit and entry). Students should understand that these terms do not refer to specific periods of time. You may want to review the isoprofit diagram from Unit 7 and relate it to Figure 8.16 (students need to be able to use it to identify whether a firm is making negative, positive, or zero economic profits).
Short-run and long-run equilibria: In the long run, the market supply curve shifts because existing firms can change their capacity (expand production to reduce average costs) and firms can choose to enter or leave the market. Students should understand the distinction between economic profits and normal profits – in long-run equilibrium, firms make zero economic profits but still make normal profits.

1. Activity type: Exercise (asynchronous)
   Activity description: Short-run and long-run effects of Brexit – Have students read this article from The Economist of market competition in the UK: https://www.economist.com/leaders/2018/07/26/like-america-britain-suffers-from-a-lack-of-competition. Questions: 1) Analyse the possible short-run and long-run equilibria for markets in the UK, assuming that there is a lack of robust competition policy after Brexit. How do the outcomes differ from those in the unit? 2) With reference to the article, discuss the challenges that regulators face when designing competition policy. Is a lack of competition necessarily bad for consumers?
   Using AI for this activity: None

Topic 3: Gains from trade and surplus analysis of policies

(Section 8.5, 8.12-8.13)
Section 8.5 analyses surplus in competitive equilibrium, while Section 8.12 analyses how a tax affects market surplus and Section 8.13 analyses how a price ceiling (rent control) affects market outcomes and surplus.

Key concept: Consumer surplus; producer surplus

Figure 8.12 explains the definitions in detail. Students should know that producer surplus is not economic rent (a payment above what is needed to sustain an activity). Thus, the term surplus as used in this unit is a measure of benefit or welfare, and there is not enough of it to generate any economic rents in equilibrium. It is best to avoid using the term ‘rents’ in this unit, unless talking about out-of-equilibrium situations, such as the positive profits outside of equilibrium which would incentivize new entry.

1. Activity type: Poll
   Activity description: Calculating consumer and producer surplus – As an extension to Exercise 8.3, use a poll for willingness to accept/pay for an everyday item (see Topic 1) to collect the data required to draw the stepwise supply/demand curves for a class of students. Ask students to calculate the consumer and producer surplus at the equilibrium price (or, using only the derived demand curve, calculate the consumer surplus at different prices).
   Using AI for this activity: None

Key concept: Pareto efficiency

Students should know that the efficiency properties of a competitive market equilibrium depend on the conditions under which buyers and sellers interact (homogenous product, price-taking behaviour, no external effects, complete contracts). Aside from Pareto efficiency, fairness is an important criterion to evaluate market outcomes.

1. Activity type: Exercise (asynchronous); Exercise (in-class)
   Activity description: Secondary markets – Have students read this article from The Economist on secondary markets for ticket sales: https://www.economist.com/britain/2016/08/20/a-muggles-game. Questions: 1) Use the supply and demand diagram in the unit to illustrate why secondary ticket markets exist. Why are secondary ticket markets difficult to monitor and regulate? 2) Discuss whether or not secondary ticket markets should be allowed, on the grounds of fairness and efficiency.
   Using AI for this activity: None
2. Activity type: Exercise (asynchronous)
   Activity description: Tickets for the Olympic games – As an extension to Exercise 8.15 (how tickets for the London 2012 Olympics were allocated), instructors could ask students to research how the tickets for more recent Olympics were/will be allocated, and compare/contrast the allocation processes in terms of efficiency and fairness.
   Using AI for this activity: Using ChatGPT’s AI voice feature, students engage in a simulation that mirrors the ticket allocation processes of recent Olympic Games. The AI voice acts as the game facilitator, presenting different ticket allocation scenarios, enforcing rules, and interacting with students as they make decisions about purchasing, selling, or distributing tickets. This simulation allows students to explore and compare the efficiency and fairness of various ticket allocation methods used in different Olympic Games. Example Dialogue “ChatGPT, you are now the facilitator for our Olympic Ticket Allocation Simulation. Please assign roles to students as ticket sellers, buyers, resellers, and local residents. Present three scenarios: Lottery System, First-Come-First-Served, and Priority for Local Residents. For each scenario, explain the rules, prompt sellers to state their prices, ask buyers to place bids, match transactions, introduce any market changes, and lead a brief discussion on the efficiency and fairness of each allocation method.”

Key concept: Taxation; tax incidence

Students should understand the effects of a tax in a competitive market (go through the steps in Figure 8.23). While such taxes result in “deadweight loss”, when evaluating the welfare effects of a tax, students should be aware of the different policy aims for a tax (raise revenue, change behaviour) and the whether the conditions for Pareto efficiency hold. It is important to understand how the price elasticity of demand and supply affect the tax incidence. Note that The Economy uses the word “incidence” to mean “effective incidence” (who bears the tax burden, in surplus terms) not “formal incidence” (who legally pays the tax). The Economy always shows the supply curve shifting but students should know that an equivalent tax on demand would have the same implications for surplus.

1. Activity type: Exercise (in-class)
   Activity description: Price elasticity and tax incidence – As an extension to Exercise 8.13, ask students to come up with examples of products with high/low elasticity of demand/supply.
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Sugar tax – Have students read this Financial Times article on taxes: https://www.ft.com/content/e76b60cc-d72e-11e6-944b-e7eb37a6aa8e. Discussion question: Examine the potential effects of a sugar tax on health, households’ and firms’ decisions, and prices in other markets.
   Using AI for this activity: None
3. Activity type: Discussion
   Activity description: “Sin taxes” – Have students read this article from The Economist on “sin taxes”: https://www.economist.com/international/2018/07/28/sin-taxes-eg-on-tobacco-are-less-efficient-than-they-look. To discuss: 1) Evaluate the arguments for and against ‘sin taxes’. 2) Based on the information in the article, what advice would you give to policymakers deciding how to levy a ‘sin tax’?
   Instructors may want to refer to Jensen and Smed’s (2013) article on the Danish butter tax for a real-world case study (the tax was removed due to administrative feasibility): https://www.econstor.eu/handle/10419/204347
   Using AI for this activity: None
4. Activity type: Data
   Activity description: Measuring the effect of a sugar tax – Project 3 of Doing Economics (https://www.core-econ.org/doing-economics/book/text/03-01.html) gets students to analyse data from a natural experiment (tax on sugary beverages in California). Part 1 compares prices of sugary beverages before/after the tax, and Part 2 compares prices of beverages (taxed and non-taxed) in affected vs non-affected areas. Instructors can set one part as a week-long assignment, and/or ask students to read the paper that the data comes from (https://tinyco.re/6616217) and discuss the tax’s effects on beverage consumption.
   Using AI for this activity: Students engage in a discussion with the assistance of an AI to examine the potential effects of implementing a sugar tax. The AI helps analyze the impact on public health, consumer behavior, business decisions, and market prices, fostering a comprehensive understanding of the economic and social implications.
   Example Prompt:
   “ChatGPT can you help me examine how such a sugar tax might affect public health, households’ and firms’ decisions, and prices? Let’s discuss the potential benefits and drawbacks. Which Identification Strategy might be most appropriate and how could it be implemented?”

Key concept: Rent ceiling

Governments may intervene in a market to change the equilibrium price, to achieve other objectives such as fairness. Figure 8.25 analyses the effects of one such policy (rent ceiling, defined as the maximum price that landlords can charge tenants).

1. Activity type: Exercise (asynchronous); Exercise (in-class)
   Activity description: Surplus analysis of rent control – Exercise 8.14 can be supplemented with the following articles on the actual effects of rent controls: Financial Times article (https://www.ft.com/content/fe805c60-a6ac-3aab-8582-41b7fcacbfc0); The Economist article on rent control in the US (https://www.economist.com/leaders/2019/09/19/rent-control-will-make-housing-shortages-worse). Students can compare/contrast the real-world examples from those in Exercise 8.14, and discuss alternative policies that governments could adopt to address the housing issue.
   Using AI for this activity: None

Topic 4: Perfect competition

(Section 8.10-8.11)
These sections evaluate whether the model of perfect competition outlined in Sections 8.1-8.4 is a “good” model – how can we determine (empirically) the extent of competition in a market and why might this model be useful even if the theoretical conditions do not hold. Section 8.11 presents a case study of how we can use prices to examine the functioning of a market, and emphasizes the concept of “prices as messages”.

Key concept: Perfectly competitive market

The model of perfect competition allows us to benchmark a real industry against a theoretically constructed one, and to hypothesize the potential gains from transitioning an actual industry to a more competitive one. Many students have issues with the model of perfect competition exactly because the industry structure it represents does not exist in real life, so it is important for them to understand why (and when) such models are useful. Point to how the models of perfect competition and monopoly (Unit 7) give us two extremes to set the limits of what we can observe in the real world. Emphasize that market structure is a “spectrum” (different degrees of competition, not a binary characteristic).
Characteristics of competitive equilibrium: Students should know the three characteristics (the Law of One Price, market clearing, price-taking participants) and apply them to real markets.

1. Activity type: Poll
   Activity description: Identifying market structure – Instructors present students with some products(e.g. bottled water, textbooks, luxury cars) and ask students to situate the markets for these products in a price-setting/price-taking spectrum. This activity can either be a quick poll (students indicate where they think the markets are on the spectrum) or a longer discussion (students evaluate the markets according to the conditions for perfect competition).
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: The Fulton fish market – As an extension to Exercise 8.12 (and the accompanying video), have students read the full article on the Fulton fish market (https://tinyco.re/4300778) and evaluate it against each of the conditions for competitive equilibrium.
   Using AI for this activity: None
3. Activity type: Discussion
   Activity description: Tech companies – Have students read this article from The Economist on the tech industry: https://www.economist.com/graphic-detail/2019/08/10/silicon-valleys-giants-look-more-entrenched-than-ever-before. Discuss: With reference to the conditions for competitive equilibrium, explain whether tech companies behave more like price-takers or price-setters).
   Using AI for this activity: None
4. Activity type: Discussion
   Activity description: Market power and perfect competition – Have students read this article from The Economist on market power in the US, Mexico, the UK, China, and Japan: https://www.economist.com/open-future/2018/10/10/capitalism-is-becoming-less-competitive. Questions: 1) Discuss the regulatory problems that are common to all or most of the countries covered in the article. 2) To what extent can the markets in these countries be classified as ‘perfect competition’?
   Using AI for this activity: None
5. Activity type: Discussion
   Activity description: The flaw of one price – Have students read this article from The Economist on the Law of One Price in the EU: https://www.economist.com/finance-and-economics/2003/10/16/the-flaw-of-one-price. To discuss: Which of the conditions of perfect competition are unlikely to hold, resulting in the price dispersion shown in the article?)
   Using AI for this activity: None

Topic 5: Cartels: Market outcomes and competition

(Section 8.8-8.9)
These sections use two different frameworks to explore the behaviour of cartels. Section 8.8 uses the supply-demand diagram to show how cartels (such as OPEC) can drive up prices by limiting supply. Section 8.9 models the price-setting decision within a cartel as a social interaction, examining conditions that give rise to stable cartels (coordination game) and conditions where cartels cannot be sustained (prisoners’ dilemma).

Key concept: Cartel

Work through the analysis in Figure 8.19, pointing out the similarities and differences between the oil market and the price-taking examples in previous sections. Notice that the market for oil has a slightly different supply curve due to the market structure (the OPEC cartel limits supply). The economic rents that arise from the short-run supply conditions particular to the oil market may give rise to incentives to find more oil. This may involve innovations to find new types of oil (for example, tar sands oil) or new methods of extraction.
Coordination game; Prisoners’ dilemma: To analyse cartel behaviour as a game, students should be familiar with best response and Nash equilibrium (Sections 4.2-4.4).

1. Activity type: Data
   Activity description: The world market for oil – Students use data on oil production by country from Our World in Data (https://ourworldindata.org/grapher/oil-production-by-country) to make charts comparing OPEC’s share with that of other countries and identify any other major “players”.
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: The world market for oil – As an extension to Exercise 8.8 (global market for oil in 2020), instructors could have students read this article from The Economist on oil prices (https://www.economist.com/finance-and-economics/2018/11/15/the-oil-price-swings-dramatically). Have students 1) Compare and contrast the world market for oil in 2018 (article) and 2020 (report). 2) Analyse the impact of American production of oil on the price of oil and on the market of oil. Explain whether you think the growth of alternative oil suppliers (besides OPEC) is a good thing for the global economy.
   Using AI for this activity: None
3. Activity type: Discussion
   Activity description: Modelling cartels – Exercise 8.9 relaxes assumptions used in the unit’s analysis of a cartel’s price-setting decisions. As an extension, instructors can ask students to brainstorm factors that promote/discourage collusion (e.g. repeated interaction, competition policy).
   Using AI for this activity: Students role-play as members of a cartel with ChatGPT moderating the discussion. The AI assigns roles, sets production quotas, and evaluates how coordination impacts pricing and market stability.
   Example Prompt:
   “ChatGPT, act as the leader of a cartel. Assign roles to participants, set production quotas, and explain how limiting supply affects global oil prices. Also explain what policies could prevent this.”
4. Activity type: Discussion
   Activity description: Cartels and market concentration – Have students read this article from The Economist on market concentration: https://www.economist.com/finance-and-economics/2017/08/31/market-concentration-can-benefit-consumers-but-needs-scrutiny. Question: Analyse the effect of increased market concentration in terms of efficiency and fairness.
   Using AI for this activity: None

Unit 9 teaching guide

Conceptual prerequisites:

• Constrained optimisation model; Principal-agent problems

Required Building blocks:

• Section 2.8 (economic models)
• Sections 3.2-3.6 (constrained choice problems)
• Section 3.7 (income and substitution effects)
• Section 5.11 (Lorenz curves and Gini coefficient)
• Section 6.6 (incomplete contracts, principals, agents)

Building blocks in this unit:

• None

Unit narrative

• Income and wealth
  (section 9.2)
  Extension – financial assets
• Borrowing
  (Sections 9.3 and 4)
• Lending and Storing (Section 9.6)
• Investing (Section 9.7)
• Inequality
  Conflict over gains (Section 9.8)
  Principal-agent relationships (Section 9.9)
  Credit exclusion, Gini coefficient (Section 9.10)
  Poverty trap for those with limited wealth (section 9.12)
  Policies to reduce risk exposure for the less well off (section 9.13)
• Environment (Section 9.5)
  Discounting, external effects and the future of the planet
• How good is the model? (Section 9.11)
  Hyperbolic discounting
  Lack of financial knowledge
  Risk aversion

What’s important/difficult and how to teach it

Topic 1: Terminology

(Section 9.2)
This section explains the definitions and usage of personal finance terms that are commonly used in everyday language: income, wealth, investment, earnings, savings, depreciation, bonds, shares. The section also introduces the distinction between stock and flow variables.

Key concept: Income, wealth, investment, earnings, savings, depreciation

Students should know the definitions of these terms and how they are used in economics (which may be different from everyday usage). The bathtub analogy (Figure 9.1) can help students distinguish between the various concepts.

1. Activity type: Poll
   Activity description: Understanding terminology – As a quick review of the terminology, instructors could use variations of question 9.2 (changing the numbers) for an in-class poll or clicker quiz.
   Using AI for this activity: Students use ChatGPT to create and take a quiz on personal finance terminology. The AI generates multiple-choice questions based on common misconceptions of terms, helping students reinforce their understanding.
   Example Prompt:
   “ChatGPT, create a 15-question multiple-choice quiz to test my understanding of terms like income, wealth, investment, savings, and depreciation. Include common misconceptions in the incorrect options and explain why the correct answer is right after I choose.”
2. Activity type: Exercise (in-class); Exercise (asynchronous)
   Activity description: Using terminology correctly – Find examples of where these terms are used in everyday language and ask students to rephrase the incorrect examples according to the definitions in the Section. For example, “we’re investing in stocks” (incorrect – should be “we’re using stocks to save”); “we’re investing in property” (correct because property is a capital good). Alternatively, instructors could ask students to find instances (e.g. advertisements, news reports) where the terminology is used differently from its economic usage, and share these examples in class.
   Using AI for this activity: None

Topic 2: An intertemporal choice model

(Section 9.3-9.7, 9.11)
Sections 9.3-9.7 set up an individual’s choice of consumption over two time periods (“now” vs “later”) as a constrained choice problem, using the framework of Unit 3. These sections analyse the decisions of two individuals: Julia, who has her entire endowment “later”, and Marco, who has his entire endowment “now”. The effect of different actions (borrowing, saving, investing, lending) and changes in the interest rate on the feasible frontier and the optimal choice (income and substitution effects) are also discussed. Note that this unit uses the real interest rate and assumes zero inflation (so the real and nominal interest rates are the same). Section 9.5 applies the concept of discounting to environmental problems, and Section 9.11 discusses why observed behaviour may not be consistent with the intertemporal choice model is (hyperbolic discounting, imperfect information, risk aversion).

Key concept: Intertemporal choice model

Make clear links back to the model in Unit 3 (MRS and MRT). In Unit 9, the feasible set represents a person’s opportunities to benefit from the credit market and depends on his/her endowment and on whether they receive it ‘now’ or ‘later’. Link interest rates back to the concept of opportunity cost (Section 9.3).
Endowment: The unit discusses different interest rates in cases where the individuals’ endowments are on one of the two axes (either all the income in the future, or all the income now). Often, some students miss that the way to represent a change in the interest rate is to pivot the feasible set from the endowment point. To ensure students understand the relationship between the feasible set and the endowment point, set an exercise in which the individual’s endowment is not at a corner, namely where there is income in both periods. Ask students to draw an increase in the interest rate in this case to help them understand that one lends or borrows from one’s current position. (The feasible frontier must always include the endowment.)
Consumption smoothing, situational and intrinsic impatience: Ensure that students understand that smoothing behavior is related to diminishing marginal returns to consumption. Students should know the distinction between situational impatience and intrinsic impatience and how they affect the shape of the indifference curves: situational impatience (having unequal endowments across time periods) makes indifference curves convex while intrinsic impatience (preferences to consume more now rather than later determines the slope of the indifference curves (whether MRS = 1 + discount rate is greater than/less than one at a given point). Exercise 9.2 helps students understand the conceptual difference between intrinsic impatience and diminishing marginal returns to consumption.

1. Activity type: Exercise (in-class); Exercise (asynchronous)
   Activity description: Drawing feasible frontiers – Exercises 9.1 and 9.6 ask students to identify points on Julia and Marco’s feasible frontiers (respectively) under specific interest rates. As an extension, instructors could choose different interest rates and specific points, then have students use the general equation of the feasible frontier to determine which points are feasible for Julia and/or Marco.
   Using AI for this activity: None
2. Activity type: Exercise (asynchronous)
   Activity description: Drawing your own indifference curves – As an extension to Exercise 9.2 (drawing indifference curves for a hypothetical individual), students to draw their own indifference curves for consumption now/later (e.g. suppose you have $50 now and $50 later. How much would you be willing to give up “later” to have an extra $10 “now”? How much would you be willing to give up “now” to have an extra $10 “later”?) Students could complete this task asynchronously and bring their diagrams to class.
   Using AI for this activity: None
3. Activity type: Poll; Exercise (in-class)
   Activity description: Revisiting income effects (IE) and substitution effects (SE) – Exercises 9.3 and 9.7 ask students to apply IE and SE to an interest rate change for Julia and Marco (respectively). For additional practice, instructors could ask students to identify the direction of IE and SE for interest rate changes in the other scenarios, both for Julia and Marco (e.g., borrowing, investing, saving, lending). Students could discuss the answers in class or instructors could turn this activity into a quick poll (one question for each scenario).
   Using AI for this activity: None

Key concept: Evaluating the model

Students should understand three reasons why real-world decision making may differ from that predicted by the model – 1) people are not consistent (hyperbolic discounting); 2) people are not fully informed (lack important information needed for the decision); 3) people prefer outcomes that are certain over taking risk (risk aversion).

1. Activity type: Exercise (asynchronous)
   Activity description: What are your risk and time preferences? – Students could answer the questions from the Global Preferences Survey on risk and time preferences(questions are in Appendix B (starting pg 34) of this PDF: https://docs.iza.org/dp9674.pdf); for country-specific questionnaires, instructors can download them from the Global Preferences Survey website: https://www.briq-institute.org/global-preferences/downloads). Students can answer the questions and compare their responses to their country’s average and other countries: https://www.briq-institute.org/global-preferences/maps. Students could complete this activity asynchronously and share results with the class.
   Using AI for this activity: Using ChatGPT’s, students answer questions from the Global Preferences Survey. The AI compares their responses to national averages and facilitates discussions on cultural differences in risk and time preferences.
   Example Prompt:
   “ChatGPT, ask me questions from the Global Preferences Survey about time preferences and risk. Compare my answers to the averages for my country and discuss cultural differences.”
2. Activity type: Discussion
   Activity description: Saving and investment rates – Have students read this article in The Economist about declining saving and investment rates: https://www.economist.com/special-report/2005/09/24/anatomy-of-thrift. Discuss: Which of the article’s explanations for the low saving and investment rates do you find the most/least convincing, and why? 2) Why do people not save and invest as much as economic theories suggest? (Instructors may want to supplement this discussion with more recent articles from after the pandemic).
   Using AI for this activity: None

Topic 3: Principal-agent problems and inequality in credit markets

(Section 9.1, 9.8-9.10, 9.12-9.13)
These sections explain the causes and consequences of inequality in credit markets. Differences in endowments mean that interest rate changes create conflicts of interest over the gains made possible by borrowing and lending; those with endowments “now” benefit from interest rate increases while those with endowments “later” do not (Section 9.8). Differences in endowments also affect the likelihood of obtaining a loan and the terms of loan repayment (Sections 9.9-9.10). Individuals who are unable to provide equity or collateral are either unable to obtain a loan (credit market excluded) or must borrow on unfavourable terms (credit constrained). Sections 9.12 discusses the vicious cycle of poverty these mechanisms create, and Section 9.13 discusses policies that could break the cycle.

Key concept: Conflict of interest

Students should understand that interest rates have different effects depending on whether an individual has all/most of their endowment “now” rather than “later”. The steps in Figure 9.14 use Julia and Marco to illustrate this point. Because the cost of moving consumption forward in time by borrowing (the rate of interest) is the same as the gain to Marco by postponing his consumption (by lending), Marco and Julia have a conflict of interest over how the mutual gains from exchange are shared.

1. Activity type: Discussion
   Activity description: Interest rates and credit card borrowing – Have students read this Financial Times article on impact of higher interest rates on credit card borrowers in the UK: https://www.ft.com/content/516d05e0-3de5-11e6-8716-a4a71e8140b0. Discuss the trends in credit card borrowing mentioned in the article and why they might be problematic. (As an extension, instructors could ask students to find equivalent data for a country of their choice and compare it with the data in the article).
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Low interest rates – Have students read these articles in The Economist about low interest rates and inequality: https://www.economist.com/finance-and-economics/2012/12/01/savers-lament; https://www.economist.com/finance-and-economics/2019/07/11/should-egalitarians-fear-low-interest-rates. Questions: 1) Who wins and who loses from low interest rates, and why? 2) To what extent does the model in the unit explain actual households’ response to a change in interest rate? What other factors need to be taken into account? (Instructors could contrast the situations described in the article with the more recent experiences of high interest rates to control inflation shortly after the pandemic.)
   Using AI for this activity: Using ChatGPT’s AI voice feature, students participate in a debate where the AI moderates and presents arguments for and against low interest rates. The AI provides insights into how different income groups are affected.
   How to Set Up:
   Say:
   “ChatGPT, act as a moderator for a debate on low interest rates. Present the perspectives of savers, borrowers, and policymakers, and ask follow-up questions for discussion.”
3. Activity type: Discussion
   Activity description: Fintech firm loans – Have students read this article in The Economist about fintech firm loans: https://www.economist.com/finance-and-economics/2019/10/10/a-group-of-fintech-firms-are-changing-the-way-consumers-borrow. To discuss: 1) Compare and contrast fintech firm loans and credit card loans. 2) To what extent is there a conflict of interest between lenders and borrowers in the fintech firm loans mentioned in the article?
   Using AI for this activity: Students use ChatGPT to compare fintech firm loans and credit card loans. The AI highlights differences in repayment terms, interest rates, and borrower-lender dynamics, helping students understand the conflict of interest in these markets.
   Example Prompt:
   “ChatGPT, compare fintech firm loans with credit card loans. Explain the differences in terms of repayment conditions, interest rates, and how conflicts of interest between borrowers and lenders arise in each.”
4. Activity type: Exercise (in-class)
   Activity description: Salary advances and inequality – Article from The Economists on salary advances: https://www.economist.com/business/2019/04/06/helping-workers-get-by. Questions: 1) With reference to the frameworks in the unit (intertemporal choice model; Lorenz curve), analyse the effect of companies such as Wagestream on individual workers’ consumption and economy-wide inequality. 2) Analyse the advantages and disadvantages of financial-services companies that offer salary advances.
   Using AI for this activity: None

Key concept: Credit market constrained; Credit market excluded

Students should understand the distinction between these two groups of people, and how credit market exclusion affects inequality. Figure 9.18 provides a useful outline of how credit and labour markets shape the relationship between groups with different endowments (such as Julia and Marco). Figure 9.19 uses the Gini coefficient to illustrate how credit market exclusion affects inequality.
Principal-agent problem; Moral hazard: Borrowing and lending is a principal–agent relationship because the lender (the principal) takes a risk of not being repaid, and the extent of that risk is determined by the borrower (the agent) not the lender. Figure 9.17 illustrates the similarity between the borrower-lender relationship and the employer-employee relationship from Unit 6.

1. Activity type: Exercise (asynchronous)
   Activity description: Impacts of microfinance – Instructors can supplement Exercise 9.11 (on microfinance) with the following literature surveys on the impacts of microfinance: 1) World Bank (2015): https://documents1.worldbank.org/curated/en/588931467993754857/pdf/Microfinance-a-critical-literature-survey.pdf (Section 4); 2) Yang and Stanley’s meta-analysis: https://www.hendrix.edu/uploadedFiles/Departments_and_Programs/Business_and_Economics/AMAES/Micro-Credit%20Meta-Analysis12-18(2).pdf; 3) Milan and Ashta (2020)’s article on challenges and opportunities created by microfinance: https://doi.org/10.1002/jsc.2339.
   Using AI for this activity: Using ChatGPT’s AI voice feature, students simulate a consultation with a policy advisor. The AI explains how policies such as microfinance, education subsidies, or universal credit could break the cycle of poverty caused by credit market exclusion. The students can ask follow-up questions to clarify concepts, delve deeper into policy mechanics, or explore real-world applications of these solutions.
   How to Set Up:
   Say:
   “ChatGPT, act as a policy advisor. Explain how policies like microfinance or education subsidies can help break the cycle of poverty caused by credit market exclusion.”
2. Activity type: Exercise (asynchronous)
   Activity description: Calculate your credit score – Have students complete a credit score questionnaire to learn about how lenders typically assess creditworthiness (link for the US: https://www.myfico.com/fico-credit-score-estimator/estimator). Students should consider how the criteria used to assess creditworthiness may advantage/disadvantage certain groups in society. This website on factors used to calculate a credit score may also be helpful: https://myhome.freddiemac.com/blog/notable/20210831-factors-credit-score). Students could complete the questionnaire asynchronously and bring their answers to class.
   Using AI for this activity: None
3. Activity type: Exercise (asynchronous); Exercise (in-class)
   Activity description: Regulation of moneylenders – Exercise 9.12 discusses limits on how much interest a moneylender can charge on a loan. Instructors can supplement the exercise with this article from The Economist about loopholes used in Japan to charge high interest rates: https://www.economist.com/finance-and-economics/2017/07/06/wanna-buy-some-cash-it-will-cost-you. Questions: 1) Use the concepts of impatience and consumption smoothing to explain the motivations of the e-commerce buyers mentioned in the article. 2) Discuss the factors that policymakers need to consider when designing regulations for lending money.
   Using AI for this activity: None
4. Activity type: Discussion
   Activity description: Peer-to-peer lending – Have students read this article from The Economist on peer-to-peer lending: https://www.economist.com/special-report/2015/05/07/from-the-people-for-the-people. Questions: 1) Discuss the role of information in loan provision, and the potential issues with collecting data for credit-scoring. 2) Compare and contrast peer-to-peer lending and traditional bank lending. What kind of regulation do you think should apply to peer-to-peer lending?
   Using AI for this activity: None
5. Activity type: Discussion
   Activity description: Credit market exclusion and the global financial crisis – Have students read this Financial Times article on credit market exclusion after the global financial crisis: https://www.ft.com/content/3d260e6c-956b-11e3-8371-00144feab7de. Discuss the effects of the global financial crisis on small business and inequality. (Instructors could ask students to make comparisons with the COVID pandemic).
   Using AI for this activity: None
6. Activity type: Discussion
   Activity description: Income, consumption, and wealth inequality – Have students read this article in The Economist on three different measures of inequality: https://www.economist.com/free-exchange/2014/07/16/a-three-headed-hydra. Discus: 1) Define income, consumption, and wealth. For each of these concepts, explain what it can and cannot tell us about inequality. 2) With reference to the article, discuss the challenges with measuring inequality for the purposes of public policy.
   Using AI for this activity: Students use ChatGPT to explore and analyze the differences between income, consumption, and wealth inequality. The AI acts as a discussion partner, helping students understand the strengths, limitations, and challenges of measuring each concept, as outlined in the article.
   Example Prompt:
   “ChatGPT, here are my definitions for income, consumption, and wealth inequality:……… . For each, check my definitions and help me understand what each metric can and cannot tell us about inequality, and discuss the challenges in measuring inequality for public policy purposes. Use examples to illustrate your points.”
7. Activity type: Data
   Activity description: Extension to Exercise 9.14 – The National Financial Capability Study (https://gflec.org/initiatives/national-financial-capability-study/) contains summary statistics on financial inclusion in the US; students can also download the data and construct summary statistics of credit market exclusion/constraints (alternatively; instructors can find equivalent surveys for non-US countries).
   Using AI for this activity: None
8. Activity type: Data
   Activity description: Credit-exclusion in developing countries – Project 9 of Doing Economics (https://www.core-econ.org/doing-economics/book/text/09-01.html) gets students to use Ethiopian household survey data to identify credit-constrained and credit-excluded households, and factors that affect a household’s credit status. Part 9.1 examines households who did not get a loan; Part 9.2 examines characteristics of households who did get a loan. Each part will take one week if done in full, but instructors can select specific questions as a shorter exercise (e.g. have students work with the cleaned data).
   Using AI for this activity: None
9. Activity type: Exercise (asynchronous)
   Activity description: Funding higher education – Exercise 9.15 asks students to consider how higher education is funded in their country. Instructors could supplement this exercise with cross-country comparisons on how higher education is funded (e.g. have students read Jongbloed and Vossensteyn 2016’s comparisons of OECD countries: https://www.jstor.org/stable/26363477)
   Using AI for this activity: None

Unit 10 teaching guide

Conceptual prerequisites:

• Pareto efficiency; Incomplete contracts; Gains from trade: Producer and consumer surplus

Required Building blocks:

• Section 4.5 (Pareto efficiency)
• Section 6.6 (Incomplete contracts; principals and agents)
• Section 7.7 (Gains from trade: Producer and consumer surplus)

Building blocks in this unit:

• None

Unit narrative

• Types of market failure
• Modelling external effects (Section 10.1-10.5)
  Marginal private cost/benefit; Marginal external cost/benefit; Marginal social cost/benefit
  Private (Coasean) bargaining; transaction costs
  Policy solutions: Pigouvian taxation/subsidy, compensation, regulation
• Information asymmetries (Section 10.8)
  Principal-agent relationship
  Incomplete contracts
  Conflicts of interest
• Public goods provision
  (Section 10.6-10.7)
  Non-rival; Non-excludable
  Artificially scarce (club) goods
  Common pool resources
  Private goods
• Hidden action (Section 10.9)
  Moral hazard
• Hidden attributes (Section 10.10)
  Adverse selection
• The limits of markets (Section 10.11)
  Repugnant markets
  Merit goods

What’s important/difficult and how to teach it

Topic 1: Modelling external effects

(Section 10.1-10.5)
These sections lay out the framework for thinking about market failure: diagnosis (sources of the problem) and treatment (private solutions and/or policy instruments). The role of information and incomplete contracts are key to understanding how market failures arise (for example, information being unavailable or unverifiable) and understanding the limitations of the theoretical solutions.

Key concept: Market failure

Market failure happens when markets allocate resources in a Pareto-inefficient way. Students should already be familiar with market failure from Unit 7. In Unit 8, the (competitive) market reaches a Pareto-efficient outcome under some assumptions. The pesticide example in Section 10.1 demonstrates that the market equilibrium allocation is no longer Pareto efficient if the assumption of no effect on others does not hold.

1. Activity type: Discussion
   Activity description: Identifying market failures – Present the various interactions in Units 4-9 and ask students to identify the ones where the equilibrium is/is not Pareto efficient. If it is not Pareto efficient, ask them to identify which of the competitive market assumptions (listed in Unit 8) is violated. For example, the public goods game in Unit 4 (no external effects), power relations between Angela/Bruno in Unit 5, employer/employee in Unit 6 (imperfect information), price-setting firms in Unit 7 (market power), competitive markets in Unit 8, credit markets in Unit 9 (imperfect information).
   Using AI for this activity: None

Key concept: External effect (externality)

When a firm’s production imposes uncompensated costs on other parties there is a divergence between the private cost of production to the firm and the social cost imposed on others by the firm’s production (a marginal external cost). Bring attention to this divergence between marginal private cost and marginal social cost. Go over the surplus analysis in Figure 10.2 to compare the privately optimal and socially optimal situation (MSC – MPC represents a social cost so there will be DWL). Sections 10.2-10.4 present a diagrammatic illustration of a negative external effect. Note that the figures in these sections assume a constant output price to keep the analytics simple. Be explicit about this as some students will wonder what happens in the case where the demand curve is downward-sloping—this case could be used as an exercise. The constant-price assumption allows a quick revision about the underlying assumptions of competitive behavior that would guarantee a horizontal market price.

1. Activity type: Exercise (asynchronous); Exercise (in-class)
   Activity description: Negative external effects – Have students read this article from The Economist on slash-and burn farming in Sumatra: https://www.economist.com/banyan/2013/06/21/hazed-and-confused. Discussion questions: 1) Draw a cost-quantity diagram to illustrate the external effect described in the article. 2) Explain why the polluter being in a different country poses additional challenges to resolving the pollution issue.
   Using AI for this activity: Students create their own cost-quantity diagram illustrating a negative externality, such as slash-and-burn farming. The diagram should include key elements like marginal private cost (MPC), marginal social cost (MSC), deadweight loss (DWL), and the corresponding social and private optima. Once the graph is completed, students upload it and ask ChatGPT to review it.
   Using AI for this Activity:
   Example Prompt:
   “ChatGPT, I’ve uploaded my cost-quantity diagram showing how slash-and-burn farming creates a negative externality. Please check if I’ve labeled the marginal private cost (MPC), marginal social cost (MSC), and deadweight loss (DWL) correctly. Also, let me know if the social and private optima are accurately placed and explain any corrections or improvements I need to make.”
2. Activity type: Exercise (asynchronous); Exercise (in-class)
   Activity description: Positive external effects – Have students repeat the surplus analysis in Figure 10.3, but for a positive external effect, to explain why a positive external effect results in a Pareto-inefficient outcome.
   Using AI for this activity: None
3. Activity type: Discussion
   Activity description: External effects and the COVID-19 pandemic – Read Pingle (2022)’s review article on policy responses to the pandemic: https://link.springer.com/article/10.1007/s11299-022-00288-6. Have students identify the various types of negative and positive externalities related to the COVID-19 pandemic, and the challenges with designing appropriate policy responses. (The policy responses themselves might have external effects e.g. developed countries do not sufficiently account for the effects of their policy actions on developing countries.)
   Using AI for this activity: None
4. Activity type: Data
   Activity description: Measuring WTP for climate change mitigation – In Project 11 of Doing Economics, students work with survey data to estimate whether the (German) public’s WTP for climate change mitigation is enough to finance the required policies: https://www.core-econ.org/doing-economics/book/text/11-01.html
   Using AI for this activity: None
5. Activity type: Extension
   Activity description: Quantifying the size of an external effect – Section 20.6 of The Economy 1.0 outlines methods that policymakers use to attempt to quantify the size of an environmental externality (contingent valuation, hedonic pricing, green growth valuation): (https://www.core-econ.org/the-economy/book/text/20.html#206-the-measurement-challenges-of-environmental-policy). Instructors can link this reading to the reading in Exercise 10.3 on Pigou’s ideas (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7814863/).
   Using AI for this activity: None
6. Activity type: Extension
   Activity description: Positional goods and Veblen effects – Instructors can return to the example of conspicuous consumption in Unit 3. For an example of quantifying the negative external effects of positional goods, you can refer to this article on ‘Luxury cars in Switzerland.’: https://doi.org/10.1016/j.joep.2011.08.013 (Findings: in Switzerland, one additional Ferrari or Porsche per 1,000 people would have the same effect on income satisfaction as a 27% reduction in household income, for everyone else in the neighborhood.)
   Using AI for this activity: None

Key concept: Coasean bargaining

Some students find understanding the relative bargaining areas in the Coase bargaining model of Section 10.3 confusing. Spend some time explaining the areas in Figure 10.3. To help students understand when bargaining is possible, note that MSC – MPC is the fishermen’s willingness to pay/accept and P – MPC is the producer’s willingness to accept/pay (depending on who has the property rights). The relative size of these two values determines whether a Pareto-improving bargain is possible, and the maximum size of the compensation (per tonne). The analysis first assumes that plantation owners have the property rights over the resources so that they can use the pesticide. Later, an alternative legal framework is proposed, where the fishermen have a legal right to clean water. Redraw for the students the areas in Figure 10.3 for this second case. It helps considerably in students’ understanding of the Coase bargaining model. It also helps understand that while the same outcome is achieved in terms of production and use of pesticide (assuming no transaction costs), the distribution of gains will be different between the two legal frameworks. Point to the limitations of Coase’s Theorem at the end of Section 10.3.
Pigouvian tax: CORE introduces taxes to internalize the external effects on the benefit side. The tax sets P = MPC at the socially optimal quantity, and thus reduces the price received by the firm (Figure 10.4). Students with prior knowledge of economics may have seen models where taxes increase marginal private cost. In our set-up, both formulations are equivalent.

1. Activity type: Discussion
   Activity description: Private bargaining in practice – As an extension to Exercises 10.1 and 10.2, for the market failures identified in Exercise 10.1, have students discuss whether private bargaining is/is not likely to resolve the issue, and why/why not.
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: Financing local infrastructure – Have students read this article from The Economist on externalities in property development: https://www.economist.com/free-exchange/2012/02/14/who-do-i-have-to-bribe. Questions: 1) Discuss the costs and benefits of using tax-increment financing for local infrastructure. What other practical issues might arise from this policy? 2) Why is Coasean bargaining difficult to implement in practice? 3) Do you think the tax-increment financing solution proposed in the article would help resolve the externality issue associated with property development?
   Using AI for this activity: Students use ChatGPT to simulate a debate between two perspectives on the use of tax-increment financing (TIF) for local infrastructure. One side argues for TIF as a solution to property development externalities, and the other highlights its practical challenges and potential drawbacks. This activity allows students to engage critically with the concept and evaluate its effectiveness.
   Example Prompt:
   “ChatGPT, act as an economist specializing in local infrastructure financing. First, explain the benefits of tax-increment financing (TIF) for resolving externalities in property development. Then, take the opposing view and discuss the practical issues and risks associated with implementing TIF. Conclude with suggestions for alternative policies that could address these externalities more effectively.”
3. Activity type: Discussion
   Activity description: Carbon pricing – Have students read this Financial Times article: https://www.ft.com/content/2d9490f2-1291-11e8-a765-993b2440bd73 and explain the challenges of adopting carbon pricing at a national and global level. Instructors can link this reading to the reading in Exercise 10.3 on Pigou’s ideas (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7814863/).
   Using AI for this activity: None
4. Activity type: Exercise (asynchronous)
   Activity description: Cap and trade – Section 20.5 of The Economy 1.0 discusses cap and trade policies (https://www.core-econ.org/the-economy/book/text/20.html#205-cap-and-trade-environmental-policies) . This section contains 3 exercises (Exercise 20.5 – 20.7) that can be used as class discussion or as a homework assignment. Exercise 20.5 asks students to write an op-ed on cap-and-trade, Exercise 20.6 asks students to analyse the US SO2 cap and trade program, and Exercise 20.7 discusses ideal climate policy.
   Using AI for this activity: None
5. Activity type: Game
   Activity description: Pollutions, taxes, and permits – Experiment 3 of Experiencing Economics, a companion text to The Economy, allows students to play a coal market game under three conditions (free market, tax, tradeable permits): https://www.core-econ.org/experiencing-economics/instructors/book/text/03.html. The instructor’s version (accessible if you have created a free CORE account) contains homework activities to accompany the experiment.
   Using AI for this activity: None
6. Activity type: Exercise (in-class)
   Activity description: Positive externalities and COVID-19 vaccine development – Watch this 5-minute YouTube video on “Externalities and Incentives: The Economics of COVID”: https://www.youtube.com/watch?v=2EFG6dvtQ6M). Ask students to research two examples of how governments have helped to incentivize the development of the current COVID-19 vaccine. Discuss the public-good/externality nature of vaccines and the interventions used to incentivize their development. You can enrich the discussion with Richard E. Easterlin’s article on the history of mortality, and the role of markets and public health policy on economic development: https://www.jstor.org/stable/41377854.
   Using AI for this activity: Students use ChatGPT to guide them in creating visual representations (e.g., infographics, posters, or digital art) that depict the economics of COVID-19 vaccine development. This project highlights the positive externalities and the role of government interventions in incentivizing vaccine production, illustrating the public-good nature of vaccines.
   Using AI for this Activity:
   Example Prompt:
   “ChatGPT, help me create a visual representation of how vaccines act as a public good and how governments incentivized their development during the COVID-19 pandemic. Suggest key elements, such as illustrations for positive externalities, public-private partnerships, and policy interventions.”

Topic 2: Public goods

(Section 10.6-10.7)
This section explains why public good are underprovided in a free market and discusses some methods of provision (with radio broadcasting as an example). The goods taxonomy in Figure 10.9 can help students understand how the nature of goods affects the performance of markets.

Key concept: Public good

CORE follows Paul Samuelson’s definition of public goods in ‘The Pure Theory of Public Expenditure’ (1954), a major contribution to the theory of public goods. Many economists since have refined the concept to include non-excludability as a defining characteristic of public goods. CORE, rather, distinguishes between non-excludable and excludable public goods, the latter called ‘artificially scarce.’ Use Figures 10.7 and 10.8 to compare the market surplus under socially efficient provision and private provision.

1. Activity type: Game
   Activity description: Playing the public goods game – If students have not yet played the public goods game (from Unit 4), Experiencing Economics, a companion text to The Economy, contains instructions on how to play this game in class [https://www.core-econ.org/experiencing-economics/instructors/book/text/01.html]. The instructor’s version (accessible if you have created a free CORE account) contains homework activities to accompany the experiment.
   Using AI for this activity: None
2. Activity type: Discussion
   Activity description: The economics of broadcasting – As an extension to Exercise 10.8 and the discussion in Section 10.6, have students read this article by Ronald Coase on “The economics of broadcasting and government policy”: http://www.jstor.com/stable/1821307. Ask students to identify the different solutions proposed and find examples of countries where each solution has been adopted. Which arguments need revising in light of legal/technological developments that have happened since he wrote the article (1966), and which arguments still stand?
   Using AI for this activity: None
3. Activity type: Discussion
   Activity description: Public goods provision at a global level – Have students read this Financial Times article on whether the state can provide public goods effectively: https://www.ft.com/content/517e31c8-45bd-11e1-93f1-00144feabdc0. Discussion questions: 1) Explain the historical origins of institutions that provide public goods and the challenges of public goods provision in today’s globalised world. 2) Why is economic stability a public good, and what are the challenges with “providing” it?
   Using AI for this activity: None
4. Activity type: Discussion
   Activity description: Are children a public good? – Have students read this article from The Economist article that discusses this issue: https://www.economist.com/free-exchange/2007/07/27/are-children-a-public-good. Questions: 1) To what extent do children fit the economic definition of ‘public good’? What kind of externality (positive/negative) could be associated with having children? 2) Do you agree with the “kids as public goods” argument? Explain why/why not.
   Using AI for this activity: None
5. Activity type: Exercise (in-class)
   Activity description: Classifying goods – Choose a good and ask students to provide conditions under which that good would fall under each of the 4 categories in Figure 10.9. Using music as an example – Rival and excludable: A one on one music lesson. Rival and not excludable: A performance in a crowded public square. Non-rival and excludable: A copyrighted tune available on Spotify. Non-rival and not excludable: ‘Happy Birthday’ the song; now in the public domain.
   Using AI for this activity: None

Topic 3: Hidden action

(Section 10.8-10.9)
Section 10.8 provides an overview of problems resulting from information asymmetries (hidden action and hidden attributes). Section 10.9 discusses moral hazard and its implications for insurance and credit markets.

Key concept: Moral hazard

Problems of moral hazard can be characterized as principal-agent problems. Students should understand how measures to mitigate hidden action problems in can exacerbate inequality (for example, requiring equity or collateral in credit markets can exclude low-income borrowers).

1. Activity type: Discussion
   Activity description: Moral hazard in the news – As an extension to Exercise 10.10, have students find examples of moral hazard in the news, and answer the same questions (identify the principal/agent, specify the hidden information, explain why the resulting allocation of resources is Pareto inefficient).
   Using AI for this activity: Students interact with ChatGPT to explore examples of hidden action in everyday life, such as moral hazard in insurance or employment. The AI generates relatable examples (e.g., an employee shirking work or an insured individual taking more risks) and asks students to suggest ways to mitigate these problems.
   Example Prompt:
   “ChatGPT, provide an example of moral hazard in car insurance. I will then explain the agents, the hidden information and efficiency then you can correct my understanding..”
2. Activity type: Discussion
   Activity description: Too big to fail – Have students read these two articles on policy reforms after the global financial crisis: The Economist (https://www.economist.com/leaders/2018/09/06/the-world-has-not-learned-the-lessons-of-the-financial-crisis); The Financial Times (https://www.ft.com/content/4b84d45e-8bec-11e7-9084-d0c17942ba93). Discussion questions: 1)To what extent did the policy reforms after 2008 address the root cause(s) of the financial crisis? 2) According to the articles, what lessons did policymakers fail to learn from the 2008 financial crisis?
   Using AI for this activity: None
3. Activity type: Discussion
   Activity description: Access to insurance – Have students read this article in The Economist on why the poor have less access to insurance: https://www.economist.com/international/2019/08/22/the-poor-who-most-need-insurance-are-least-likely-to-have-it. Discussion questions: 1) Discuss the challenges that insurers face when providing insurance to the poor. How could they encourage the poor to purchase insurance? 2) According to the article, what factors affect the demand and supply of insurance for the poor?
   Using AI for this activity: None

Topic 4: Hidden attributes

(Section 10.10)
This section uses Akerlof’s classic “lemons” example to explain how hidden attributes (such as product quality) can result in missing markets or Pareto inefficient outcomes (relative to the full-information case).

Key concept: Adverse selection

Work through the bullet points in the used car and health insurance examples to help students understand the logical steps behind market “unravelling”. Figure 10.13 shows how the asymmetric information problems of moral hazard and adverse selection fit into the unit’s framework for understanding external effects.

1. Activity type: Discussion
   Activity description: Technology and information asymmetries – Have students read this Financial Times article on how technology affects traditional information asymmetries in the insurance business: https://www.ft.com/content/4c4913a2-bbce-30ba-9c39-0ae23062adbf. To discuss: Explain why too little information and too much information pose problems for insurance markets.
   Using AI for this activity: Students use ChatGPT to analyze how digital technologies (e.g., blockchain or AI) can address asymmetric information in markets. The AI suggests mechanisms like smart contracts or real-time monitoring, and students evaluate their feasibility.
   Example Prompt:
   “ChatGPT, explain how blockchain technology can reduce information asymmetry in food supply chains. Suggest practical ways this could improve market outcomes.”
2. Activity type: Discussion
   Activity description: Addressing information asymmetries – Have students read this article by Thierer et al (2015) “How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms solve the “Lemons Problem”: https://www.mercatus.org/students/research/working-papers/how-internet-sharing-economy-and-reputational-feedback-mechanisms. It discusses historical and modern methods of mitigating informational asymmetries and contains plenty of case studies for discussion.
   Using AI for this activity: None
3. Activity type: Discussion
   Activity description: The market for lemons – Have students read this article in The Economist on used car markets: https://www.economist.com/finance-and-economics/2019/09/26/can-you-buy-a-good-second-hand-car. Questions to discuss: 1) Explain why Akerlof’s theory about the “market for lemons” differs from what actually happens in used car markets. 2) Compare and contrast the research findings discussed in the article with the predictions of Akerlof’s “market for lemons” paper.
   Using AI for this activity: None

Topic 5: The limits of markets

(Section 10.11)
This section discusses the limitations of markets on moral grounds, where the buying and selling of certain goods may violate ethical norms or undermine the dignity of those involved. Resources might instead be allocated by governments, firms, or families.

Key concept: Repugnant markets

Some market transactions conflict with the way we value humanity or democracy. You can refer to the United Nation’s declaration of human rights for a set of values that governments aim to protect. The section outlines examples of laws, like commercial surrogacy laws, that attempt to regulate repugnant markets.
Merit goods: Point to how there are moral/ethical reasons to provide some goods irrespective of ability to pay, just as there are moral or ethical reasons to ban transactions for certain goods. Merit goods are typically provided by governments.

1. Activity type: Exercise (in-class)
   Activity description: Economic transactions and human rights – As an extension to Exercise 10.13, have students refer to United Nations’ Declaration of Human Rights to help consider what kinds of ethics/human rights would be violated, even if the transaction involved consenting adults: https://www.un.org/en/about-us/universal-declaration-of-human-rights
   Using AI for this activity: None
2. Activity type: Exercise (in-class)
   Activity description: Markets and civic life – Have students watch this 10-minute TED talk of Michael Sandel: https://tinyco.re/7650014. Ask students to summarise Michael Sandel’s argument and explain why they agree/disagree with Michael Sandel’s points about markets, inequality, and democracy. Instructors can supplement the TED talk with this Financial Times article (also by Michael Sandel) on the limits of markets: https://www.ft.com/content/58c2a83a-63e2-11e2-b92c-00144feab49a.
   Using AI for this activity: None
3. Activity type: Exercise (in-class)
   Activity description: Matching markets – Have students watch this 5-minute video of Nobel Laureate Alvin Roth discussing matching markets as a way to facilitate organ donation: https://www.youtube.com/watch?v=r7vzgexzXOk. Alvin Roth’s Journal of Perspectives article is also helpful to explain why a transaction may be considered repugnant, with both current and historical examples: https://dash.harvard.edu/bitstream/handle/1/2624677/Roth_Repugnance.pdf?sequence=6
   Using AI for this activity: Students use ChatGPT to evaluate policies for regulating repugnant markets, such as organ donation or commercial surrogacy. The student provides examples of regulations and the AI critiques or improves them based on ethical considerations.
   Example Prompt:
   “ChatGPT, I will suggest three policies to regulate a legal market for organ donation and I’ll include measures to protect donors and maintain public trust. Then can you evaluate their ethical and practical implications.”
4. Activity type: Discussion
   Activity description: Markets for organ donation – Have students read this article from The Economist on legal markets for organ transplants: https://www.economist.com/international/2008/10/09/the-gap-between-supply-and-demand. Questions: 1) Discuss the pros and cons of creating a legal market for organ transplants. 2) What important factors do policymakers need to consider in order to maintain the public’s trust in the market? 3) Explain whether or not you agree that buying and selling organs should be a legal transaction. If you agree, discuss some rules you think are necessary to regulate the market, If you disagree, suggest an alternative solution.
   Using AI for this activity: None