Pit Market Trading Student Instructions EconApps 2.0 Instructions start with communism, introduces price controls, and then introduces free markets with a later increase in demand. Pit Market Trading Student Instructions

Logging On Click EconApps 2.0 app Hold in portrait mode Tap token for session Fill out name and session password provided by your instructor Enjoy the Economist quotes while you wait to start!

Pit Market Description You will participate in a series of trading rounds in a Pit Market. A pit market is similar to the trading floor or pit of the stock market where people are running around making trades. At the beginning of each round you will be randomly be assigned the role of a buyer or a seller.

Buyer Role Screens If you play the buyer role, you will be able to swipe between three screens: Your Earnings Screen, Your Wallet Screen, and Your Trade Screen

Buyer Role: Earnings Screen Trade ticker Round earnings = combined widget value + tokens remaining You start off with a token endowment Your round earnings accumulate   Time left  Profits made per widget Profit = Value – Price  You buy Widgets (if you can profit)

Buyer Role: Wallet Screen Trade ticker Token denominations You finger-drag a token from here  You can make change by tapping an empty token This will decrease Time left  To there  This will increase (it’s your offer)

Buyer Role: Making Change on Wallet Screen Tap empty token spaces to make change  Before After 

Buyer Role: Trade Screen Trade ticker A QR Code will be automatically generated Press the trade button first  Time left  Your offer here

Seller Role Screens If you play the seller role, you will be able to swipe between three screens: Your Earnings Screen, Your Wallet Screen, and Your Trade Screen

Seller Role: Earnings Screen Trade ticker Round earnings = combined widget value + tokens collected You start off with a widget endowment Your round earnings accumulate   Time left  Profits made per widget Profit = Price - Value  You sell Widgets (if you can profit)

Seller Role: Wallet Screen Trade ticker Token denominations You finger-drag a widget from here  Widgets left will decrease Or use the buttons  Time left To the right  off the screen  Widgets offered will increase

Seller Role: Trade Screen Trade ticker Your camera will activate Press the trade button first  Time left  Your offer here  Scan the buyers QR code

Communism Stage Round 1: No trades allowed (start and end the round). Their earnings equal the value of their endowments. Round 2: Communism Buyers trade half their tokens and sellers trade half their widgets, Leaving everyone with 25 tokens and 2 widgets. Discussion: Widgets and tokens are equal, but what about earnings? Equivalent to a market with a fixed price of 12.5 and fixed quantity of 2 per seller. What happens if we allow some freedom in the market? If you want you can have students compare their earnings over rounds 1 and 2, tally those better off (should be everyone). Otherwise you can compare at the end. Round 1 = Buyers 50 each, Sellers 28 each Round 2 = Buyers 51 each, Sellers 43 each

What trades should I make in a market? As a Seller… Trade Price should exceed Widget Value Trade Profit = Trade Price – Widget Value As a Buyer… Trade Price should fall below Widget Value Trade Profit = Widget Value – Trade Price

Voting on Price Controls Stage People may trade as much as they want, as long as it doesn’t violate the price control selected. Round 3: Sellers Vote on a Price Floor, Random Vote is Selected Round 4: Buyers Vote on a Price Ceiling, Random Vote is Selected Ask students to compare their earnings in the first four rounds, tally highest payoff by role It is possible for price controls to be worse than communism if the control is far from the equilibrium price. Prices were needed to generate incentives, and communism evolved into a centrally planned socialist economy with “universal price controls” imagine having to guess the “right prices” for thousands of goods and services. Still price controls have existed in market economies and still exist in the form of “anti-price gouging” laws (hidden price ceilings) and government barriers to entry (hidden price floors).

Price Controls You will have the opportunity to see your widget values and role as buyer or seller prior to your voting on a price control. Buyers will vote for a price ceiling price <=ceiling Sellers will vote for a price floor price >=floor

Price Controls A vote will be randomly selected to dictate the price floor in round 3 and price ceiling in round 4. Once a price control is set illegal trades will receive a message like this 

Free Market Stage Rounds 5-X: No price controls, free market trading Let the students find the equilibrium price Compare last round earnings with previous rounds 1-4 Rounds X+1 until the end: Free market trading, increase in demand Let the students find the equilibrium price again

Rounds 5-X Quantity axis units are actually increasing with the number of sellers. Equilibrium Quantity is actually 3*number of sellers. The number of rounds it will take to find the price will vary based on the size of the market. Here the market is small so it might take awhile.

Rounds After X – Increase in Demand

Comparison of Rounds Role R1 R2 R3 R4 R5 R6 R7 R8 Buyer Seller Total You can have students add up their earnings on the whiteboard, on an excel sheet, or you can export the session data to calculate.

No Trade, Communism, vs. Free Markets Round 1: No Trade Each Buyer’s earnings = 50 Each Seller’s earnings = 4 + 6 + 8 + 10 = 28 Total Class earnings = 50*B+28*S = 78*Pairs = Round 2: Communism Each Buyer’s earnings = (14 + 12) + 25 = 51 Each Seller’s earnings = (8 + 10) + 25 = 43 Total Class earnings = 51*B+43*S = 94*Pairs = Rounds 4-X: Free Markets Each Buyer’s earnings = 50 + (14-9)+(12-9)+(10-9) = 59 Each Seller’s earnings = (9 + 9 + 9) + 10 = 37 Total Class earnings = 59*B+37*S = 106*Pairs = Potential losses from communism = 12*Pairs = Why do command economies fail? Knowledge and incentive problems

Gains from trade are maximized in a free market Blue shaded area is consumer surplus for the market, and the red shaded area is producer surplus. The gains from trade = consumer + producer surplus is maximized at the equilibrium price of 11 tokens. Assuming that people will only trade if they can make a profit, any other price would result in fewer trades and less consumer surplus.

Gains from trade are lost under price controls: price floor Blue shaded area is consumer surplus for the market, and the red shaded area is producer surplus. The gains from trade = consumer + producer surplus is maximized at the equilibrium price of 11 tokens. Assuming that people will only trade if they can make a profit, any other price would result in fewer trades and less consumer surplus.

Gains from trade are lost under price controls: price ceiling Blue shaded area is consumer surplus for the market, and the red shaded area is producer surplus. The gains from trade = consumer + producer surplus is maximized at the equilibrium price of 11 tokens. Assuming that people will only trade if they can make a profit, any other price would result in fewer trades and less consumer surplus.

Takeaway Lessons Free Market Exchange creates more Surplus than Communism. Free Market Exchange creates more Surplus than market exchange under price controls. The Invisible Hand Free Markets align Self-interest with the Social-interest Price discovery and market equilibrium is an emergent order, little information is required