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Melting ice and teaching the effect of competition on profits

Monday, November 01, 2010
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A block of ice (or a few ice cubes) can be a great visual aid to the teaching of what happens in a competitive market when supernormal profits exist. All you need is the ice and a large tray to hold the water that has melted.image

I set this up at the start of the class where I will teach long-run equilibrium in perfect competition. I do not tell the students the meaning of the visual aid but invite them to think about it as we go through the lesson. Once we have covered the theory and drawn the graphs I ask them if they can figure out the meaning. Water represents profits and the ice cubes are the supernormal profits earned by one or a few firms. As time passes, competitors enter the market and the profits are then evenly distributed across all the firms in the market (over the tray).

You could also have some other ice cubes in a thermos (or something similar) so that the ice doesn’t melt which you can then go on to discuss barriers to entry!




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