Exploring Economic Efficiency ^*

©2004 Nathan Sivers Boyce, All Rights Reserved.

Economic efficiency is one of the central, organizing concepts in nearly all undergraduate economics courses, but introducing students to robust notions of efficiency (in perfect markets) is challenging for at least two reasons. First, some students struggle with even the basic mechanics of the market model. Second, even students who master market mechanics often struggle to achieve a useful and nuanced understanding of economic efficiency, such as the close connection between efficient market outcomes and the original distribution of income. Efficiency.xls is a simple, interactive tool to help address some of these teaching challenges.

Efficiency.xls uses spreadsheets to model a simple world in which two goods are produced and distributed to up to two types of consumers via perfect markets. It helps users learn basic market mechanisms by allowing them to adjust economic variables (e. g. prices, number of producers) and view the effects in tables and graphs. The click of a button puts the economy into equilibrium (long run or short run). More importantly, Efficiency.xls also prompts discussions that lead to more nuanced understandings of efficiency. A dialogue box allows users to compute, store, and compare the long-run equilibrium of this economy under different assumptions about parameters such as preferences, costs, population and/or the initial distribution of wealth. This quickly reveals the connection between different underlying parameters and different, but all efficient, outcomes. For example, concerns about (the influence of advertising on consumer preferences?) or the initial distributions of wealth appropriately raise important questions about potential limitations of market efficiency.

Efficiency.xls is designed to be simple enough to use with Principles level courses but may be useful in more advanced courses, as well. It is flexible enough to be used for classroom demonstrations and/or homework assignments. More specific suggestions about its potential uses may be found in the User Guide. I have found that Efficiency.xls provides a concrete way to stimulate discussion and more robust understandings of the real meaning of market efficiency.

Please click on one of the following links below to learn more:

User Guide

Download

^*I would like to thank my colleagues at Willamette University for many helpful conversations about teaching that have shaped this effort. Of course, any errors (of judgment or content) are my own.