Lecture Notes: Supply and Demand Model Experiment

Introduction

• Concept: Use of supply and demand curves to predict market prices and quantities.
• Objective: Test the accuracy of predictions made by supply and demand models through experimentation.

Experiment: Double Oral Auction

• Conducted by: John Taylor and Toby Page.
• Participants: Economics students.
• Method: Double oral auction where both buyers and sellers announce prices.
  • Buyers bid the price they are willing to pay.
  • Sellers ask the price they want for their items.
  • Agreement on price leads to a sale.

Rules of the Experiment

• Buyers and Sellers: Must keep their private information confidential.
• Buyers' Information:
  • Given a sheet with a marginal benefit table.
  • Each buyer's marginal benefit varies.
  • Buyers aim to maximize net gain (marginal benefit - price paid).
• Sellers' Information:
  • Provided with a marginal cost table.
  • Sellers aim to sell items at a price higher than the marginal cost for a net gain.

Auction Process

• Auctioneer Role: Observes bids and asks, facilitates acceptance.
• Bidding:
  • Buyers and sellers indicate their bids and asks by raising hands.
  • Acceptance of a bid/ask is indicated by raising two hands.

Predicting the Outcome

• Supply and Demand Curves:
  • Individual supply and demand curves are combined to form overall market curves.
  • Intersection of supply and demand curves predicts market outcomes.
  • Predicted result: 8 units sold at prices between $3 and $4.

Observations and Results

• Auction Execution:
  • Various bids and asks were made.
  • A total of 8 transactions occurred.
  • Final transaction price settled around $3.25.
• Model Validation:
  • Experiment confirmed the predictions: 8 units sold, prices between $3 and $4.
  • Demonstrated the model's accuracy in predicting market behavior.

Conclusion

• Success: The experiment validated the supply and demand model's predictive capability for market outcomes.
• Future Implications: Further experiments can enhance understanding and model accuracy.