Students / Subjects

# Supply Curve Experiment

## Overview

The professor endows each student with an M&M packet and seeks to purchase up to 3 packets from the lowest bidders via an open-exit format reverse English auction. The auction begins with all students standing. The teacher gradually decreases the price per packet from \$3 (often in 5 cent increments to speed up the process) and students sit down when the price reaches a level below what they are willing to accept to give up the M&M packet. By sitting down, a student is announcing that he or she is dropping out of the bidding and will not reenter. Students are instructed at beginning of the auction (and reminded during the auction) to write down on their index cards the price called immediately before the price that caused them to sit down (i.e., the price that represented the minimum amount that they were willing to accept to give up the M&M packet). When there are only three students standing, the auction ends (see below for rules when there are ties). The three lowest bidders are instructed to estimate the maximum amount that they were willing to pay for the M&M packet and write it down on their index cards. The teacher collects all index cards and enters the values into the EconPort supply and demand curve graphing screen (see below). The graphs form the basis of the lecture material on supply curves.

## Student Instructions

These instructions are written assuming that the teacher reads them to students in class, but can easily be modified for reading outside of class prior to the lecture period. They can also be given in writing to students, but many professors simply read them to the students and highlight the key rules on the board. Index cards can be passed out while the instructions are being read. If you are running the supply and demand experiments on the same day, you can pass out both index cards at once (modifying the instructions where they indicate how many cards a student should take).

I am now going to run another classroom auction that is similar to the previous one we ran with the exception that instead of selling M&M packets through the auction, I will be buying M&M packets. Please listen carefully as I read the instructions for this auction. I am passing out blank index cards and you should each take ONE card. You should not write anything on this card until told to do so. I am also passing around "fun size" M&M packets (1.69 oz). You should each take just ONE packet. Please do not take any more than one packet.

I (the teacher) will be purchasing up to three M&M packets from students in the classroom. You can sell a maximum of one packet each. Prior to participating in the auction, think about the minimum price at which you would be willing to sell your M&M packet to me.

The auction begins with every student standing, so please stand up now. I am writing on the board the starting price for the auction, which will be \$3. I will then begin to decrease the price. By remaining standing, you are indicating that you would be willing to sell your packet of M&Ms at the price most recently announced. If at any point in the auction, the announced price drops below the minimum price at which you are willing to sell a packet, you should sit down.

When you sit down, please write on your index card the price that came before the announced price that caused you to sit down. In other words, write down the price that was either equal to or greater than the minimum price that you were willing to accept for giving up your M&M packet. You do not write anything else on the card.

The price will decline until three or fewer students remain standing. At this point the price stops declining and all bidders still standing will receive this price in exchange for a packet of M&Ms. We ask that these winning bidders estimate the minimum amount that they were willing to accept for giving up their M&M packet, if the price had continued declining, and write it down on their index cards.

[optional text]: Please notice that in this auction (called a reverse English auction), it is in your best interest to sit down only when the price drops below the minimum price you are willing to accept for selling a packet of M&Ms. You can do no better, and will sometimes do worse, by lying about your minimum price. You cannot do better by sitting down early or standing up after the price passes your minimum acceptable price. If you sit down early, you may miss out on selling a packet of M&Ms at a price more than what you would be willing to accept for giving it up. If you remain standing too long, you may end up having to give up the packet for a price lower than what you normally would be willing to accept.

1. Avoiding Students Having to Pay in Real Currency: As with the demand curve experiment, one can instead run the experiment as a hypothetical thought experiment or use extra credit points as the currency.

2. Maximum Reserve Price: If some students sit down immediately at the starting price of \$3, the instructor can choose to either (1) revise the reserve price up from \$3 so that all students remain standing at the starting price or (2) instruct these students to write down their minimum reservation price.

3. Lowering the price in 5-cent increments: See Teacher Instructions for Demand Curve Experiment. One additional problem that a teacher might experience in this experiment is more than three students with \$0 reservation prices. In this case, the teacher can either use the tie-breaking rule discussed in Teacher Instructions for Demand Curve Experiment or the teacher can simply "buy" all available packets at \$0.

## Data Entry

The data can be entered in class immediately after the experiment or out of class between lectures. Data entry in class is more transparent because students can see the values entered into the computer and then organized from lowest to highest. However, data entry in class takes away time from lecture. Data entry takes about 5 minutes of class with fewer than 75 students if one student reads the values and the professor enters them into the data screen.

1. Launch the Supply and Demand Graphing Tool.
2. On the 'Data' tab, enter data points from the index cards. You do not have to sort the index cards prior to entry. After data entry, name your data set (such as 'Demand for M&Ms') and press the 'Save as Supply Schedule' button.
3. Display the supply schedule by switching to the 'Chart' tab and selecting your newly-created data series.