Foundation for Teaching Economics

Introduction:

Understanding how markets work and the role of prices within markets is an important key to being able to explain and predict economic behavior. In true markets, prices are determined by the interaction of buyers and sellers.

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Concepts:

Supply
Demand
Market Clearing Price
Competition

Economic Content Standard:

Standard 5 - Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce goods and services.

Benchmarks: Students will know that:

A market exists whenever buyers and sellers exchange goods and services.
Market prices are determined through the buying and selling decisions made by buyers and sellers.
The market clearing or equilibrium price for a good or service is the one price at which quantity supplied equals quantity demanded.

From the extension activities:

A shortage occurs when buyers want to purchase more than producers want to sell at the prevailing price.
A surplus occurs when producers want to sell more than buyers want to purchase at the prevailing price.

Standard 8 - Prices send signals and provide incentives to buyers and sellers. When supply or demand changes, market prices adjust, affecting incentives.

Benchmarks: Students will know that:

High prices for a good or service provide incentives for buyers to purchase less of that good or service and for producers to make or sell more of it.
Lower prices for a good or service provide incentives for buyers to purchase more of that good or service and for producers to make or sell less of it

From the extension activities:

Government-enforced price ceilings set below the market clearing price and government-enforced price floors set above the market clearing price distort price signals and incentives to producers and consumers. The price ceilings cause persistent shortages, while the price floors cause persistent surpluses.

Standard 9 - Competition among sellers lowers costs and prices, and encourages producers to produce more of what consumers are willing and able to buy. Competition among buyers increases prices and allocates goods and services to those people who are willing and able to pay the most for them.

Benchmarks: Students will know that:

Competition takes place when there are many buyers and sellers of similar products.
Competition among sellers results in lower costs and prices, higher product quality, and better customer service.
Competition among buyers of a product results in higher product prices.
The level of competition in a market is influenced by the number of buyers and sellers.

Lesson Description:

This lesson simulates a market for computer chips. Students, acting as buyers and sellers, will experience the competitive nature of markets. As a result, they will see how competition influences the price of goods and the decisions of buyers and sellers.

Time Required : 1-2 class periods

Materials:

Student buyer and seller cards (use 2 colors or use colored arm bands for sellers if buyer and seller cards are the same color)
Student work sheet
Overhead transparency of Student Worksheet
Overhead transparency of Tally Sheet

Teacher note: This activity will work best with a class of 20-30 students, but up to fifty can participate. Before class make up 32 buyer and 32 seller cards according to the following distribution.

Buyer Cards		Seller Cards
Buy Price	No.	Sell Price	No.
$3.50	2	$3.50	4
3.70	2	3.70	6
3.90	2	3.90	6
4.10	2	4.10	4
4.30	4	4.30	4
4.50	4	4.50	2
4.70	6	4.70	2
4.90	6	4.90	2
5.10	4	5.10	2

Procedure:

Explain to students that they are going to take part in a market simulation. Read the handout, "How To Play In The Chips." Read aloud or have students read silently and then review the procedures and answer student questions.
You may want to designate one student to oversee the distribution of the buyer and seller cards during the activity and another to record each transaction on the tally sheet. Buyer and Seller cards should be kept in separate piles and each pile should be shuffled between rounds. Place the piles of buyer and seller cards at opposite ends of the desk or table to minimize the possibility of students taking cards from the wrong pile.
Clear the center of the room and designate it as the marketplace.
Divide the class into two equal groups. One group will be the sellers, the other the buyers. Explain that buyers will be buyers throughout the activity and that sellers will be sellers throughout the activity. (If you are using armbands, give these to the sellers.)
Hand out individual score sheets on which participants can record their transactions. Review details of the score sheet if necessary. Make sure students understand how to calculate "profit" on their score sheets.
Explain that you will conduct a number of rounds of trading sessions of five minutes each. (You may want to do one practice round.) For tallying purposes ask students to make all transactions in ten cent increments. Announce to students when one minute remains in each round.
Encourage students to make as many deals as they can in the time permitted. Explain that it is permissible to take a loss in order to get a new transaction card. In order to encourage participation explain to students that if they make no transactions in a round they must count the amount on their card as a loss at the end of the round.
After each trading round, allow students time to figure their net losses and gains - their "profit."
During non-trading time between rounds, direct students' attention to the market record on the tally sheet. Tell them that it may contain useful information for them. Do not elaborate.
After the final round have students calculate their total profit or loss for all rounds.

Debriefing Questions:

Ask for a show of hands from those who made money, from those who lost money. Ask who made the most money. Ask how many buyers and how many sellers made money.
Call on a couple of the money-makers and ask why they think they were successful.
Call on a couple of the students who lost money and ask why they think they were unsuccessful.
Ask students what conditions made the market work well. (Equal number of buyers and sellers, like products for sale, equal or full knowledge about the products, clear rules concerning what you could and couldn't do in the market)
Direct students' attention to the class tally sheet and ask if they can make any statements about price in the various rounds. Follow-up question: What was the most frequent transaction price in each round?
In which round was there the greatest spread in transaction prices? Why?
Why did the transaction prices become more clustered in the final rounds?
(Competition is the most important cause for the clustering of prices. This phenomenon represents the tendency of a competitive market to move toward an equilibrium or market clearing price. Many factors help to account for this.- better information, more astute buyers and sellers, better identification of particular buyers and sellers etc.)
Who determined the "market price" for computer chips - buyers or sellers?
(Both. It is the interaction of buyers and sellers that determine the market clearing price)

Ask both the buyers and sellers where they would have set the price if they'd had the power to do so.
(Buyers would set a lower price and sellers would set a higher price.)
Ask students if they would describe this as a competitive market. Ask who was in competition with whom? (It is important to note that buyers compete with buyers to bid prices up and sellers compete with sellers to bid prices down.)

Optional Extension:

You can conduct additional rounds of the activity to explore with the students what effect changes in market structure will have on market price and on buyer and seller behavior.
Tell students that you feel badly that not enough buyers made money because the price of computer chips was too high. Consequently, you are going to play another round, but as the teacher you are setting the maximum price at $3.70. (As you run the round you will find that sellers choose not to participate. The eventual result is far fewer transactions in the marketplace and fewer computer chips offered for sale.)
Tell students that the computer chip industry is so important that you want to make sure that sellers make enough money to stay in business so you are going to set a minimum price of $4.90 for the next round. (This time buyers will choose not to participate, so sellers will not be able to sell their high priced chips.)
To see how important the numbers of buyers and sellers are to successful markets you can conduct a round in which you designate just two students as sellers and everyone else as buyers. Put the sellers in opposite comers of the room and give them each half of the seller cards. Explain that sellers must still draw a new card from the face down stack for each transaction they choose to make. (You will find that the market works surprisingly well with this mix of buyers and sellers. There will be fewer transactions and the price will rise some, but not in the dramatic fashion that students might predict). Discuss whether or not the sellers were still in competition with each other and how much that influenced the market price. (Markets can be quite competitive with unequal numbers of buyers and sellers.)

This lesson has been modified, for use in Foundation for Teaching Economics materials by Kathy Ratté and Kenneth Leonard, from The Big Apple published in In The Marketplace, 1978. Used by permission. Office of the Superintendent of Public Instruction, State of Washington.

HOW TO PLAY "IN THE CHIPS"

Read these instructions carefully as your teacher reads them aloud.

The goal for both buyers and sellers in this activity is to make a profit.
Each buyer will have only one buyer card at a time. It will say, "You are authorized to buy a box of computer chips. Pay as little as possible. If you pay more than ______ per box, you lose money."

DO NOT REVEAL THE PRICE. Record the price on your buyer card on your student score sheet.

When the round starts, try to buy at the lowest price you can. However, you may buy at a price higher than that on your buyer card in order to obtain chips. As soon as you have bought chips, record the transaction on your score sheet. Then, turn in the buyer card you have and get another buyer card from the buyer pile. If you have bought no chips during a round, get a different buyer card from the buyer card pile before the start of the next round.

Each seller will have only one seller card at a time. It will say, "You are authorized to sell one box of computer chips for as much as possible. If you accept less than ______ per box you lose money."

DO NOT REVEAL THE PRICE. Record the price on your seller card on your student score sheet.

When the round starts, try to sell your chips at the highest price you can. You may sell at a price lower than that on your seller card to get rid of your chips. As soon as you have sold your chips, report the transaction price to the person keeping the Market Tally Sheet in the front of the room. Then record the transaction price on your score sheet. Then, turn in your seller card you have and get another from the seller pile. If you sell no chips during a round, get a different seller card before the start of the next round. Remember: The seller reports the price.

When the teacher says "Start," sellers and buyers are free to move around the room and to make transactions with one another. Any seller may talk with any buyer.
Both buyers and sellers are free to make as many transactions as they want in a round. For tallying purposes, please make all transactions in ten cent increments. Remember to trade in your card after each transaction.
During the game, keep track of your progress on the student score sheet. Compute your gains and losses by taking the difference between the price on your buyer or seller card and the price of the transaction.
- If you are a buyer, you will make a "profit" if you buy at a price lower than the price shown on your card. If you buy at a higher price, you suffer a loss.
- If you are a seller, you will make a "profit" if you sell at a price higher than the price shown on your card. If you sell at a lower price, you suffer a loss.

STUDENT SCORE SHEET
"In the Chips"

Name: Class:

Circle One: BUYER SELLER

Transaction	Price on Card	Transaction Price	Gain	Loss	Profit
1
2
3
4
5
Total For Round 1
1
2
3
4
5
Total For Round 2
1
2
3
4
5
Total For Round 3
1
2
3
4
5
Total For Round 4
Grand Total

Transaction Price	Round 1	Round 2	Round 3	Round 4
5.40
5.30
5.20
5.10
5.00
4.90
4.80
4.70
4.60
4.50
4.40
4.30
4.20
4.10
4.00
3.90
3.80
3.70
3.60
3.50
3.40
3.30

SELLER

You are authorized to
sell one box of computer
chips for as much as possible.