Students / Subjects

# Demand and Supply Teaching Module

Summary: The professor sells an announced number of M&M packets (or other inexpensive good) through an English auction to derive a classroom demand curve. In the same lecture period or a subsequent one, the professor gives each student a packet of M&Ms and buys back an announced number of packets through a reverse English auction to derive a classroom supply curve.

Motivation: Students often have trouble understanding that demand and supply curves are visualizations of marginal benefits (MB) and marginal costs (MC). Even when they have such an understanding, they often do not see the logic of ordering these values from highest to lowest for demand curves and from lowest to highest for supply curves. We describe two simple paper & pencil in-class experiments that help solidify student understanding of supply and demand.  It also prepares students for studying (and participating in experiments about) competitive equilibrium theory and other market characteristics (e.g., taxes, price controls).

Concepts Covered:

1. How MB/WTP/reservation prices can be arranged to construct a demand curve and why it makes sense to organize them from highest to lowest;
2. How MC/WTA/reservation prices can be arranged to construct a supply curve and why it makes sense to organize them from lowest to highest;
3. What a step function (curves) is and why later lectures and their textbook describe supply and demand curves as straight lines;
4. Why diminishing marginal benefits for individual consumers makes sense;
5. How one can use supply and demand curves to predict what might happen if classroom trade were allowed. This last concept leads to a discussion of how "classroom trade" might have been conducted if an auction were not used (e.g., command and control; unorganized bilateral bargaining; posted offers; double auction), which then leads naturally into competitive equilibrium theory and double auction experiments.

Time Required:

1. Running each experiment takes about 10-15 minutes (for classes of 30-120);
2. Entering the data in EconPort takes about 1-2 minutes to navigate to the page and 2-3 seconds per student to enter the data;
3. Graphs are rendered immediately;
4. Lecture material provides up to 45 minutes of lecture.

## Experiments

Materials:

1. Two index Cards for each student in class.
2. One "fun size" packet of M&Ms (1.69 oz) for each student plus three additional packets (instead of M&Ms, the professor can choose any inexpensive good for which most students would have a positive reservation price).
3. Supply and Demand Graphing Tool

Considerations:

1. For professors who run the experiments prior to the lecture period, some prefer to run both experiments in the same lecture period, while others prefer to run the demand experiment on one day and the supply experiment on another day;
2. Some professors prefer to run the experiments, enter the data and begin lecturing on supply and demand in the same lecture period. Other professors prefer to run the experiments in a lecture period(s) prior to introducing supply and demand, entering the data between lectures, and then giving the supply and demand lectures. In our opinion, neither approach dominates the other and thus the choice is left up to the professor;
3. If one runs the experiment prior to the lecture period, one can print or make PDFs of the classroom supply and demand curves, which can be used as lecture handouts during the lecture.

## Lecture

In the lecture material below, supply and demand are developed jointly. Some teachers, however, will prefer to do demand in its entirety and then supply and thus we separate out the sections to allow a teacher to rearrange the text below to allow for separate presentations.

Lecture to Accompany Demand and Supply Experiments