David R. Henderson  

Pricing in Economics Textbooks

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On a list serve that I receive, Warren Gibson, an economics instructor at San Jose State University, recently wrote:

Rothbard's Man, Economy, and State discusses bargaining at length but I can't think of another text that does so. Rothbard starts with isolated individuals hashing out terms of a trade, and then moves to more liquid markets where supply and demand curves emerge (yes, he does use graphs).

Most texts that I know of get it backwards, skipping over bargaining entirely and going direct to perfect competition. Then, typically, they tell us that real markets' failure to live up to perfect competition justifies government intervention.

Even Boettke's The Economic Way of Thinking, which I like very much,
falls short. He introduces comparative advantage with an example about two home brewers who decide to specialize and trade. It merely states, "after some negotiation, they agree to try the following arrangement" without saying that the arrangement was just one of many possibilities that could have benefited both.

Warren's right. My favorite intro text is the aforementioned Heyne, Boettke, and Prychitko. But, as he says, even this one doesn't start from small numbers. I'm thinking that this fall, when I teach a principles course, I'll insert a short reading on this. I glanced over Rothbard's pp. 91-108. I'd like something shorter but as readable. Any ideas?

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COMMENTS (11 to date)
Felix writes:


In this old article Joel On Software alludes to the demand curve not necessarily sloping down as the price goes up.

Anyway, it's a good taste of the seller's side of bargaining.

Michael OBrien writes:

I think you're unlikely to do better than ME&S here. 18 pages actually seems quite accessible given the careful treatment Rothbard gives this subject. From personal experience, I remember ME&S as a breath of fresh air concerning bargaining, providing sufficient depth without unneeded complexity.

Arnold Kling writes:

The Ricardian model of the gains from trade has a hidden problem in that the price at which trade takes place is indeterminate (or has to be assumed to the be pre-trade price in the larger country). The problem is constant returns to scale.

Switching to diminishing returns gets you a determinate price, but at the cost of a more difficult calculation. I did create an example for students here (see the heading "trade with diminishing returns"), but I doubt that it gets the point across to anyone who is new to economics--there is just too much information there.

I prefer to start out my economics courses with a rent-vs.-buy calculation. It does not demonstrate gains from trade, but it is something that makes sense, has obvious practical value, and helps introduced students to interest rates. It also helps suggest how prices might be determined in asset markets.

JP Koning writes:

Menger's Principles of Economics gets it done it 4 short and readable pages. 194-197.

JLA writes:

What about Osborne's chapter bargaining?

Rebecca Burlingame writes:

Prior to working as a bookseller I had several years experience in a large flea market, and learning the process of negotiating prices is quite a workout which can leave you awake at night. But what really stuck out in my mind was a former co-worker from an office, who thought the whole process of negotiating prices was beneath what civil people should be doing and expressed this to her child in no uncertain terms in front of me. One on one buying and selling is not distasteful, the fact that many people do so in informal markets is just one reason why the U.S. is far behind other countries in numbers of self-employment .

wintercow20 writes:

I've misplaced my old copy of Alchian's Exchange and Production - would he have a good write up in there? Being a UCLA grad I suspect you think the answer is no, since you didn't mention it already.

Chad Seagren writes:

You might go old school and try Carl Menger's "Principles of Economics." The last half of the chapter on the theory of exchange goes over a nice example of individuals trading horses and cows and exploiting gains from trade. (ppg 181-190)

azmyth writes:

Another option is to write out a list of your most important concepts and write a chapter yourself. Pedagogy is a very important skill for an economist to develop, especially since figuring out the most critical ideas to teach helps one organize their thinking.

TH writes:

David Friedman's textbook Price Theory has a rather basic 2 page introduction, Chapter 6 Part 2 Complications of two-person trade. Text is online at www.davidfriedman.com

Admiral writes:

Actually, Rothbard's discussion in "What Has Government Done to Our Money?" of moving from barter to currency is closely related to what you're looking for and might be useful.

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