Experiment 2 The Potato Market
Learning objectives
With this and the next experiments your students will have contact with concepts explored in unit 8.
Key concepts
- Competitive market
- Willingness to accept
- Willingness to pay
- Supply and demand
- Tax incidence
Introduction
Is it possible to predict the aggregate behavior of a group after hundreds of individual decentralized decisions?
Economic theory proposes that individual willingness to accept and willingness to pay a price generate supply and demand curves (Unit 8.1). Markets reach a competitive equilibrium based on pursuit of personal benefits (under certain conditions) (Unit 8.5). In general, the economy keeps moving between different equilibriums. When market conditions change, supply and demand curves transform as well (Unit 8.6). Taxes have a major role in perceived individual incentives; therefore, they have the ability to alter market balance (Unit 8.7).
This activity recreates a free market under controlled conditions to generate a decentralized equilibrium. Students will be assigned a role as potato producers or retailers. Given their conditions (production costs and reselling prices) students will have to take decisions related to trading their commodities. After a number of rounds, the market will face a shock (tax imposition). Theory predicts prices will increase on average; and, the number of transactions will be reduced by this shock.
