EconApps 2.0 Pit Market Trading Student Instructions

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

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

Buyer Role Screens

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  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

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

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

Approve or Cancel the Trade O Once a trade is initiated it can be approved or canceled. O Check the trade for accuracy with your verbal agreement! O To Approve both have to hit “Accept.” O To Cancel only one has to hit “Reject.”

What happens after the trade? O As a Seller… O Less Widget(s) O More Tokens O Your earnings and wallet screens are updated O You can make another trade (if limit is not met) O As a Buyer… O More Widget(s) O Less Tokens O Your earnings and wallet screens are updated O You can make another trade (if limit is not met)

Market Equilibrium O There are market demand and market supply curves representing the widget values of all of the buyers and sellers, but you don’t know what they look like. O There is a market equilibrium price at the intersection of these curves, but you don’t know where the curves intersect. O The market demand and market supply curves can change in any round because markets are dynamic!

Rounds 1-4

Rounds 5-8 – Increase in Demand

Are we better off? O Measure difference between last round earnings and starting point O Buyer starts with 50 tokens O Seller starts with 4 widgets, worth 28 tokens if kept O Individual Consumer’s Surplus = Buyer’s Profit from a trade O Individual Producer’s Surplus = Seller’s Profit from a trade O Consumer Surplus = sum of Buyers’ profits for all trades O Producer Surplus = sum of Sellers’ profits for all trade O Total Surplus (Gains from trade) = Consumer Surplus + Producer Surplus

Gains from trade are maximized in a free market

Are we better off? O Let’s total up our earnings for the last round. O Maximum Gains From Trade = [( )*B + ( )*S] = 16*B+16*S O Actual Gains from Trade = Total Class Earnings - (50*B + 28*S) = O Market Efficiency = Actual/Max*100% =

Free Markets vs. Communism O Suppose instead we had Communism: Complete physical redistribution of tokens and widgets. O Each Buyer’s earnings = [( ) + 25] = 59 O Each Seller’s earnings = [(4 + 6) + 25] = 35 O Total Class earnings = 59*B+35*S = O Compare with total class earnings for the last round. O Max Possible Class Earnings = Endowments + Maximum Gains From Trade = (50*B + 28*S) + [( )*B + ( )*S] = 66*B+44*S O Actual losses from communism = O Why do command economies fail? O Knowledge and incentive problems

Adam Smith, The Wealth of Nations, 1776 As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Hayek Hypothesis in 3 Parts (by Beckmann and Werding) O Competitive markets lead to allocations which fully exhaust the available gains from trade. O Competition co-ordinates individual activities in such a way that individuals decide as if they had access to society’s entire stock of information, although each of them possesses but a tiny fragment of it. O And because society is spared the expense of explicitly collecting, aggregating, and disseminating this tremendous amount of information—a task which might well prove impossible—, competition as a coordination mechanism is superior to alternative ones. O Competition provides incentives for individuals to discover (or create) new pieces of information. Moreover, price signals, which encapsulate all of society’s present knowledge, guide individual research efforts in the right direction.

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

Price Controls O Random Dictator Rounds O At the beginning of each round you will be told whether you are a buyer or seller, your Widget valuations, and asked to vote on your most preferred price control. O A vote will be randomly selected (using a random # generator) to dictate the price control. O Once a price control is set illegal trades will receive a message like this 

Price Controls O Median Voter Rounds O At the beginning of each round you will be told whether you are a buyer or seller, your Widget valuations, and asked to vote on your most preferred price control. O This time the votes will be on a exact price, which will be the only legal price. O All votes will ordered from highest to lowest and the median vote will dictate the exact price.

Externalities O You will need to discover market equilibrium, but there is a problem the market is not socially efficient! O Some buyers in some rounds will not be allowed to trade. O Negative externality = each widget traded creates a public bad and costs everyone 2 tokens. O Positive externality = each widget traded creates a public good and pays everyone 2 tokens.

Taxes and Subsidies O We will have no price controls, but we will apply O $1 tax on sellers (this round) O $1 subsidy to buyers (next round)

Takeaway Lessons O Free Market Exchange creates more $urplus than Communism. O Free Market Exchange creates more $urplus than market exchange under price controls. O Taxes and subsidies shift the demand or supply curve they are applied to and result in a deadweight loss and thereby less $urplus than free market exchange.