Academic journal article Journal of Private Enterprise

Common Economic Principles Illustrated in Ordinary Classroom Activities

Academic journal article Journal of Private Enterprise

Common Economic Principles Illustrated in Ordinary Classroom Activities

Article excerpt

For some students, taking a course in economics is a trying experience. It's not that the concepts are difficult, but they seem unfamiliar. This need not be the case. After all, economics is simply the study of making choices, and students make choices. Students routinely apply economic concepts in their everyday classroom activities. Pointing out the economic concepts that underlie familiar activities can demystify the process of learning economics. Both teachers and students of economics benefit when economic principles are illustrated with examples which are common to them.

It is useful to point out to students that economics relates directly to the things they care most deeply about One thing students care about is earning good grades. They are well aware that anytime you enroll in a course, you run the risk of getting a poor grade. They also appreciate that there are more than one kind of risk involved. There is always the risk of doing poorly because one doesn't put forth his best effort. One may cut classes and fail to do assignments. In this way, a student may do poorly, even in a class in which it would be easy to earn a good grade. Students will also be aware that this is not the only source of grade risk. They know that even diligent students earn grades they are not pleased with in some courses. Some courses cover inherently demanding material (thus those "honk if you passed P-Chem" bumper-stickers). Also some professors are much stricter or more demanding than others. Thus there are two kinds of grade risk; those related to the behavior of the student, and thus peculiar to each student (idiosyncratic), and those rekted to the nature of the course and/or professor, and thus common to all students (systemic). Although the terms idiosyncratic and systemic may be unfamiliar to students, the concepts are definitely familiar. They should have no trouble extending the idea to the area of finance, where idiosyncratic risk applies to the performance of an individual asset (stock or bond) and systemic risk affects the market as a whole.

The way idiosyncratic risk is overcome in markets is through diversification. It is much more prudent to invest in a variety of assets than in a single asset. Students may appreciate a connection here to considering the number of assignments on which one's grade depends. In law school courses it is not unusual for a student's grade to depend on only two factors; being prepared when called upon in class and a final exam. Such grading criteria may prove unnerving. Failure to perform well on the exam can be devastating. Students might prefer several exams, with the opportunity to recover from a single poor showing. Interim assignments also generate extremely valuable information regarding grading criteria.

Students, of course, have a much better chance of avoiding systemic grade risk than investors have of avoiding systemic market risk. Students can often simply select another course. In a world with perfect information, they will know which courses to take and which to avoid. Information can be scarce, however, giving students plenty of first-hand experience relating to the economics of information. One way to get some very useful information about potential courses would be to attend every course under consideration during the drop-add period. This might not be possible and, in any case, would be very costly. We see here the concepts of search cost and opportunity cost illustrated. Even if none of the courses under consideration met at the same time, attending very many cksses during the first week or so of school can be physically draining, and takes away from other things that one could be doing, such as buying books, doing homework, socializing or relaxing. That is, there are opportunity costs involved - every time a student attends a class, he must forgo whatever he would have chosen to do with that time, given the opportunity. The concept of opportunity cost is even more explicitly apparent when two candidate classes meet at the same time. …

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