A Market in wheat A SIMULATION OF THE MARKETPLACE
A Market in wheat(ROLES) • Half the class are buyers • The other half are sellers • Two students will be record-keepers (one on the board; another on paper) • Two students will distribute cards (one will hand out blue buy-order cards; the other will hand out yellow sell-order cards)
A Market in wheat(set up) • Center of the room is designated as the “marketplace” • When the teacher says “The market is open,” buyers and sellers get one card, meet in the middle of the room and try to agree on a price for a bushel of wheat. • Any buyer can talk to any seller
A Market in wheat(procedure) • Every time a price is agreed on and a sale made, write down the amount on your score sheet, report the transaction to the recorder and get a new card • Make as many transactions as you can • The goal: MAKE AS MUCH MONEY AS YOU CAN • When the teacher says, “The market is closed,” no further transactions will count.
Discussion questionsafter ROUND #1 • To make a profit, should you be making many or few transactions? • Should you let other students see the information on your card? • Do you have to make a profit on every transaction to have a profit at the end? • Should you watch the classroom tally sheet on during the trading rounds?
Discussion questionsafter ROUND #2 • At what price was wheat most frequently sold in each round? • This price is known as the “market-clearing” or equilibrium price. Why would economists calls it the “market-clearing” price? • In which round did the greatest spread in prices occur?
Market Equilibrium = • The situation where the demand for a product at a given price = supply of a product at a given price. • No excess demand. No excess supply. • Point of maximum efficiency and maximum profit. • The producer makes just enough to sell at a given price without losing sales or making too much.
Do you remember this graph? The equilibrium price = the price where the goods and services supplied by the producer equals the goods and services demanded by the customer(s).
Who determined price? • Did buyers or sellers determine the price for wheat? • A: Yes, through their interaction in the marketplace • How did competition among the sellers and buyers influence the price? • A: Because of competition within both groups, no single buyer or seller controlled the price
“The invisible hand” • A metaphor used by Adam Smith to describe how the market “regulates” itself • The forces of self-interest and competition push the market to the equilibrium Adam Smith, philosopher (1723-1790)
“The invisible hand” • Sellers: Self-interest is to get the highest price, but competition among sellers keeps prices low • Buyers: Self-interest is to get the lowest price possible, but competition among buyers may push prices up (think auction) Adam Smith, philosopher (1723-1790)
Round 3 & 4 • In Rounds 1 & 2 there were equal numbers of buyers and sellers. • What would happen if there were many more sellers than buyers? • What would happen if there were many more buyers than sellers? • Round 3: More Sellers • Round 4: More Buyers
What would happen if there was only ONE seller? • What would this market look like? • What would happen to price? • Would the seller have to work hard to attract new buyers? • Described this market using the word “competition” • Is this good for the seller? • Is it good for the buyers? • What is this market situation called?
Should the government create rules to avoid monopoly? • Why is a company without competition harmful to the country? • The United States has laws (called anti-trust or anti-monopoly) laws that allows them to break up monopolies
Three historical examples: • Standard Oil Company, forced in 1911 to break into 33 separate companies • American Bell Telephone Company (now AT&T) forced to break into independent companies in 1984 • Microsoft Corporation sued by the Justice Department in 1998 for controlling the market
Are these modern companies monopolies? • Google? • Facebook? • Do they use their market power to destroy competition?