org PROFESSIONAL DEVELOPMENT AP ® Microeconomics Market Failure and Deadweight Loss CuRRICuLuM MODuLE 1 11b-4985 11b_4985_AP_Micro_CM_Cvr.indd 1 6/1/12 10:37 AM PROFESSIONAL DEVELOPMENT AP ® Microeconomics Market Failure and Deadweight Loss CURRICULUM MODULE The College Board New York, NY About the College Board The College Board is a mission-driven not-for-profit organization that connects students to college success and opportunity. Founded in 1900, the College Board was created to expand access to higher education. Today, the membership association is made up of over 6,000 of the world’s leading educational institutions and is dedicated to promoting excellence and equity in education. Each year, the College Board helps more than seven million students prepare for a successful transition to college through programs and services in college readiness and college success — including the SAT® and the Advanced Placement Program®.
The organization also serves the education community through research and advocacy on behalf of students, educators and schools. For further information, visit www. © 2012 The College Board. College Board, AP, Advanced Placement Program, SAT and the acorn logo are registered trademarks of the College Board.
All other products and services may be trademarks of their respective owners. Visit the College Board on the Web: www. Equity and Access Policy Statement The College Board strongly encourages educators to make equitable access a guiding principle for their AP programs by giving all willing and academically prepared students the opportunity to participate in AP. We encourage the elimination of barriers that restrict access to AP for students from ethnic, racial and socioeconomic groups that have been traditionally underserved.
Schools should make every effort to ensure their AP classes reflect the diversity of their student population. The College Board also believes that all students should have access to academically challenging course work before they enroll in AP classes, which can prepare them for AP success. It is only through a commitment to equitable preparation and access that true equity and excellence can be achieved. 3 Connections to the AP® Microeconomics Curriculum.
4 Connections to the AP Microeconomics Exam. 5 Instructional Time and Strategies. 5 Lesson 1: Market Structure and Deadweight Loss. 7 Activity 1: Perfect Competition and Market Efficiency.
9 Activity 2: Monopoly and Market Failure. 14 Activity 3: Monopoly and Public Policy Group Activity. 18 Lesson 2: Externalities and Public Goods: Market Failures and Deadweight Loss. 21 Activity 1: Positive and Negative Externalities.
23 Activity 2: Public Goods. 42 Curriculum Module Summary. 43 Next Curricular Steps. 44 Preface Preface AP® curriculum modules are exemplary instructional units composed of one or more lessons, all of which are focused on a particular curricular topic; each lesson is composed of one or more instructional activities.
Topics for curriculum modules are identified because they address one or both of the following needs: • a weaker area of student performance as evidenced by AP Exam subscores • curricular topics that present specific instructional or learning challenges The components in a curriculum module should embody and describe or illustrate the plan/teach/assess/reflect/adjust paradigm: 1. Plan the lesson based on educational standards or objectives and considering typical student misconceptions about the topic or deficits in prior knowledge. Teach the lesson, which requires active teacher and student engagement in the instructional activities. Assess the lesson, using a method of formative assessment.
Reflect on the effect of the lesson on the desired student knowledge, skills, or abilities. Adjust the lesson as necessary to better address the desired student knowledge, skills, or abilities. Curriculum modules will provide AP teachers with the following tools to effectively engage students in the selected topic: • enrichment of content knowledge regarding the topic • pedagogical content knowledge that corresponds to the topic • identification of prerequisite knowledge or skills for the topic • explicit connections to AP learning objectives (found in the AP curriculum framework or the course description) • cohesive example lessons, including instructional activities, student worksheets or handouts, and/or formative assessments • guidance to address student misconceptions about the topic • examples of student work and reflections on their performance The lessons in each module are intended to serve as instructional models, providing a framework that AP teachers can then apply to their own instructional planning. — The College Board 1 Introduction Introduction Mary Kohelis Brooke High School Wellsburg, W.
A fundamental concept in microeconomics is the maximization of consumer and producer surplus through efficient free markets. The purpose of this AP curriculum module is to examine market failure and deadweight loss, key areas in which efficiency eludes the free market. Although students taking the AP Microeconomics Exam are expected to answer questions on these subjects, as described in the AP Economics: Microeconomics Macroeconomics Course Description, many students have trouble understanding the material. In his 2011 AP Microeconomics Exam Report, Chief Reader David Anderson listed 11 topics, on the operational and overseas exams, that proved challenging to students.
The concepts of market failure and deadweight loss make up four of those topics. Some of the course textbooks do not explain these subjects adequately. Therefore, students must depend on their teachers’ initiative and expertise in supplementing the textbook with appropriate resources. Although deadweight loss is a part of several economic models, teachers, as well as students, may not take into account the connections that exist.
For example, deadweight loss that exists in firms with market power, in markets with positive and negative externalities, and with public goods all share one trait: a loss of efficiency. This curriculum module offers teachers a ready resource for the information and skills necessary in helping students understand market failure and deadweight loss. The first lesson, “Market Structures and Deadweight Loss,” written by James Redelsheimer, begins with an explanation of efficiency in the perfectly competitive market and serves as the benchmark for the activities that follow, by showing the efficiency achieved in a perfectly competitive industry. The second half of Lesson 1 describes the monopoly model: it illustrates the market failure that exists when a monopoly charges a higher price and produces a lower quantity than the perfectly competitive industry.
Lesson 2, “Externalities and Public Goods,” by Pamela Schmitt, presents detailed descriptions and graphical analyses of two additional areas in which inefficiency exists in free markets. In the first activity, Schmitt distinguishes between marginal private benefits/costs and marginal social benefits/costs as they pertain to both positive and negative externalities. The second activity provides teachers with an instructional tool for explaining public goods and the deadweight loss that exists if only private markets are considered. It is important to note that in both Lessons 1 and 2, the discussion focuses on the issues of market failure and deadweight loss with the polar extremes of market structures, those being perfect competition and pure monopoly.
Although not a part of this curriculum module, the other market structures — monopolistic competition, oligopoly, and duopoly — also exhibit market failure and deadweight loss. 3 AP Microeconomics Curriculum Module Connections to the AP Microeconomics Curriculum This curriculum module supports the AP Microeconomics curriculum in several areas. Lesson 1 addresses the following topics: consumer surplus, producer surplus, market efficiency, efficiency and perfect competition, and inefficiency of monopoly under firm behavior and market structure. Lesson 2 addresses marginal social benefit and marginal social cost, positive externalities and negative externalities, public goods versus private goods, and provision of public goods.
Connections to the AP Microeconomics Exam The 2008 and 2009 AP Microeconomics Exams included questions concerning monopolies and efficiency. On the 2010 exam, students identified consumer and producer surplus as they related to a perfectly competitive market. Explanations of these topics are included in Lesson 1 of this module. Question 3 of the 2010 and 2011 exams asked students to identify and shade the area of deadweight loss, given certain conditions.
By following the strategy as described in Lesson 2 of this module, teachers emphasize the line of reasoning that will help students correctly determine deadweight loss, regardless of the circumstances. Instructional Plan To present the instructional materials in this module effectively, teachers should be proficient in explaining the market structures and in interpreting the accompanying graphical analyses. Lesson 1 requires teachers to link the various market models to the concept of efficiency and deadweight loss. Using the graphs of a perfectly competitive industry and of a monopoly, the teacher compares and contrasts the two models.
In Lesson 2, teachers must differentiate between the marginal private costs/benefits and the marginal social costs/benefits. In both lessons, teachers need to be alert to signals of student misunderstanding, especially with the identification and explanation of deadweight loss. Both lessons include methods of instruction that support several learning preferences. In Lesson 1, students are provided introductory information in lecture format, followed by opportunities to work in small groups; they are also encouraged to illustrate their answers.
Additional questions accompany the lesson for reinforcement of the subject material. Finally, by assigning groups the responsibility of creating a pricing policy for a monopoly, teachers offer students the chance to role-play and to reach a consensus decision. In Lesson 2, similar strategies address various learning styles. Assessments As with any of the topics listed in the AP Economics: Microeconomics Macroeconomics Course Description, teachers pose questions throughout the lesson to determine student comprehension.
Inviting students to work on problems on a whiteboard, overhead projection, or chalkboard is another way to 4 Introduction assess comprehension quickly while providing students with the means of sharing information with the class. Prerequisite Knowledge Each lesson in this curriculum module begins with a review of the basic information students should already possess. Prerequisite knowledge includes familiarity with the economic way of thinking and with such concepts as supply, demand, market equilibrium, market structures, costs, and revenues. Furthermore, students are expected to have at least been introduced to the topic of externalities in the market.
They should also be proficient in their use and interpretation of graphs. Besides supply and demand, students must have graphed the cost and revenue curves associated with market structures. The fundamentals of efficiency are explained and graphed, so students should benefit from this review. As additional information is introduced, teachers pose questions that help them identify students having trouble comprehending the material.
Instructional Time and Strategies Teachers can use Lesson 1 as a culminating activity for the unit “Firm Behavior and Market Structure” (II, D) in the course description; it should take two or three 50-minute periods. Activity 1 is best introduced after students have become proficient in describing and graphing perfectly competitive markets. Activity 2 is best introduced following the lesson on monopoly pricing. Lesson 2, which is most appropriately included in the last unit to be covered, “Market Failure and the Role of Government” (IV, A.B), should require two or three 50-minute periods.
Activity 1 complements the lessons on externalities. The activity enhances the information contained in many of the textbooks. Activity 2 suggests that the connection between externalities and public goods in this lesson needs to be stressed; therefore, the lessons should be taught sequentially. The two activities supplement many textbooks’ presentations of both concepts.
5 Lesson 1 Lesson 1: Market Structure and Deadweight Loss James Redelsheimer Armstrong High School Plymouth, Minn. Essential Questions • How does a perfectly competitive market lead to socially desirable outcomes? • What is deadweight loss and how is it shown on a graph? • Why does a monopoly lead to a market failure, and how can a monopoly be regulated? Lesson Summary This lesson helps students understand market failure as it relates to any form of imperfect competition and specifically to monopolies. For students to analyze market failure in this context, they must first review, and then be able to explain, why perfectly competitive markets lead to socially desirable outcomes that generate productive and allocative efficiency. Students then learn to identify consumer and producer surplus as a foundation for examining market failure and the way in which it minimizes these surpluses.