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Teaching the Price Mechanism

 A topic in Micro I have always struggled to teach is the price mechanism. It's a bit embarrassing to admit this given it is the foundation of all market economics but I often find that whilst pupils can understand the concept of an equilibrium and how an equilibrium can change, exactly why the price mechanism leads to an efficient allocation of resources can appear quite nebulous.

This year, I have tried to break down what the component parts of this to sequence it more effectively and what I have got to is:

1. What is the economic problem

2. What is the impact of a change in prices on Demand/ what causes a shift in Demand

3. How do prices respond to excess demand or supply?

4. How does this lead to a new equilibrium?

5. What are the functions of the price mechanism that cause a new equilibrium?

6. How does this lead to an efficient allocation of resources?

7. How does this link back to the economic problem?

The first 4 question are relatively easy to understand when explained explicitly but it is the final 3 parts where I find that students can struggle. This year, I have tried to integrate this more into explanations of demand and supply to make these links easier to understand.

One way I do this is to try and label and explain the price mechanism within a diagram. I've recently been reading Ollie Lovell's excellent guide to cognitive load theory and he speaks about the split-attention affect where pupils having to look between a diagram and a separate explanation of that diagram can increase the extraneous cognitive load of a student.

This year instead I use an adapted version of the diagram below so I can take what they have already leaned (how shifts in demand and supply lead to a new equilibrium) and insert the terminology of the price mechanism so they understand how they relate:


I then ensure lots of deliberate practice of this with instant feedback. I've created a simple a3 sheet pupils fill in to explain for each shift in demand or supply if there is initially excess supply or demand, how that impacts price and then to show how different elements of the price mechanism impact this within a diagram.

Following on from this, I then set a lot of drill questions so pupils can discriminate between the functions of the price mechanism. There is a nice concrete example that Tim Harford uses about a coffee shop which explains the signalling function to coffee bean farmers, polystyrene cup manufacturers etc which I think helps differentiate between the incentive and signalling functions. I find questions explaining the difference between these functions really helps explore the boundary concepts of the price mechanism.

Using booklets this year filled with drill questions has definitely had an impact on making these concepts clearer with pupils as they get so much more feedback than they have ever had before.

In order to fully understand the link between this and an efficient allocation of resources, first I now explicitly define what this means. I blogged recently on a use of a visualiser to model clear definitions which I think helps. The way I explained the concept this year was to use a non-example (or the 'difference principle' in Adam Boxer's book on explicit instruction) so I discussed a case study of a Soviet Famine to show how excess demand can persist in the absence of a price mechanism which I think made this far clearer.

It still isn't perfect but I think I'm getting closer at explaining the concept properly!

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