Experiment 1: Worksheet for the Open Outcry Market Experiment

Please upload your responses in by 9:45 AM on Monday, Sept. 12. Please provide the digital version on
Moodle for your answers.
These questions help us think about the open outcry auction/ market experiment. The basic data that are
necessary for answering these questions are posted on Moodle under Experiment 1 results. Your answers to
these questions can be short. We just need you to work through the worksheet.
1. Transactions costs are the costs the demander and supplier must incur to arrive at a mutually beneficial
trade. They include acquiring the information to find a demander (or supplier), transportation costs, the costs of
negotiating an agreement and so forth. The higher the transactions costs, the more difficult it is to carry out
exchange.
a. Which transactions costs did you incur during the open outcry auction market?
-The transaction costs I incurred is Transportation cost- the cost to transport the good to the buyer, the cost of
gaining information to find a demander (or supplier) and The cost of negotiation to an agreement.
b. If potential buyers and sellers were scattered all over campus, how would that affect transactions costs?
Would it be possible to negotiate the best price under these circumstances? Please briefly explain your thinking.
-If the potential buyers and sellers are scattered all over campus then the size of the outcry auction market
increases which has a big impact on the transaction costs that incur in the open outcry market. Firstly, the cost
of gaining information to find a demander (or supplier) will increase because a very large area needs to be
covered. Secondly, the cost of negotiation will also increase because the buyers and sellers are scattered
everywhere in the large market. Finding the right buyer and seller will be very hard and costly. Plus there could
be loss too to the buyer or seller when they dont find the right people to negotiate with.
c. Was there a difference in transactions costs between round 1 and round 2 of Session 2? Did the difference
affect your ability to make a trade? How (if it did)?
Yes, there was a difference, in round 1 we were allowed to talk and in round 2 we werent allowed to talk so
negotiating cost was higher in round two. Because, I was a buyer so the seller just set one price and I did not get
to negotiate a lot about the price with the seller to decrease it. I was not allowed to speak so I had to go with the
price of the seller suffering a small profit.
2. If you were a supplier, did you find that you were competing against the demander when you were trying to
make a trade, or against other suppliers? Or, if you were a demander, were you competing against the seller, or
other demanders?
I was a supplier and I felt I was competing with other suppliers. The suppliers were trying to sell their goods in
their preferred price so they were constantly approaching the buyers taking all of the good buyers with high
buyer value. So they were competing with me to find good buyers.

3. Sometimes people refer to markets as information machines. What information did you have as an individual
market participant at the beginning of a session? As you traded, what information did the market process
provide you about market conditions?
At the beginning I thought that there would be enough buyers for all the sellers and every buyer would have the
same buyer value and would buy the product at the price I set it.
-The information I gained was.
You have to be quick while trying to find buyers to sell your goods.
There arent enough buyers for the seller.
The buying value is different with every individual.
The buyer will always try to negotiate and try to set a price best for them.

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The remainder of this worksheet asks questions that will help us to identify some important lessons from the
experiment. As with experiments in chemistry or physics, this experiment reveals some important clues about
how markets work and how effective they are allocating the scarce good of wheat. We will first construct a
supply-demand model of the market that includes information about market participants. We will then see
whether the experiment resulted in trades that on average were close to what the model would predict.
For the remainder of the questions, please refer to Tables 1 through 2, which are posted on Moodle under
Experiment 1: Results.
Table 1A-Shows the distribution of types of suppliers and demanders by either their seller cost or by how much
their buyer values were for wheat in session 1
Table 1B-Shows the distribution of types of suppliers and demanders in session 2.
Table 2This is a list of every transaction in the final round of Session 1 and in the final round of Session 2.
The information is the price for wheat, the buyer value, the seller cost and the profit made by the buyer and the
seller in the transaction. The table also provides information on the average sales price.
__________________________________________________________________________________

4. Supply and Demand Schedules. Please fill in the following supply and demand schedules for each of the
two sessions. Please use Tables 1A and 1B. The tables have the information on the actual distribution of
buyers and sellers in the market. Buyers are arranged according to buyer value. Sellers are arranged according
to seller cost.
The supply and demand schedules show information on the potential trades (of wheat for money or money for
wheat) that could be made. They depend upon who the demanders and suppliers actually were in JC 001 on the
day of the experiment. The supply and demand schedules are used to figure out what the theoretical demand
and supply curves are. These are the curves that appear in the textbook. Where the two curves cross is the
theoretical market equilibrium (the market price and quantity that results when all potential voluntary trades
have been made).

Use Table 1A to fill in the supply and demand schedules for Session 1.
2

Supply Schedule for Session 1

Use Table
Demand Schedule for Session 1
1B
to
fill
Note the price rises in this table
in the
Note the price falls in this table
supply
Quantity willing to
Range of prices
and
Quantity potentially
be Supplied (Qsupplied)
demand Range of prices
Demanded (Qdemanded)
P<$11
0
P>$49
0
P$11 and P<$21
P$49 and P>$39
P$21 and P<$31
P$39 and P>$29
P$31 and P<$41
P$29 and P>$19
P$41
P$19
schedules for Session 2.
Supply Schedule for Session 2

Demand Schedule for Session 2

Notice
that
Note the price falls in this table
for finding
Note the price falls in this table
the supply
Quantity willing to
schedule for
Range of prices
Quantity potentially
be Supplied (Qsupplied)
suppliers, Range of prices
Demanded (Qdemanded)
0
P<$11
the P is
0
P$11 and P<$21
compared P>$49
P$49 and P>$39
with the
P$21 and P<$31
seller
P$39 and P>$29
P$31 and P<$41
cost(C).
P$29 and P>$19
P$41
Only those
suppliers for whom P is at least $1 above their seller cost P$19
will be willing to sell (supply).
For demanders the P is compared with buyer value (BV). Only those demanders for whom the price is $1 or
more below their buyer value will be willing to buy (demand).

6. Does any one trader in the market know what the supply curve actually looks like on a particular trading
day? Does anyone participating know what the demand curve actually looks like in the market?
7. We will explore the idea of the equilibrium market price and equilibrium quantity. The market-clearing or
equilibrium price is a price that ensures that all potential profitable trades will have taken place. At
equilibrium, the amount offered to the market (quantity supplied) equals the amount purchased (quantity
demanded). Where the demand curve crosses the supply curve sets the equilibrium price and the equilibrium
quantity. That price and quantity is what the market process should end up with, if it is working correctly.
Given the two graphs you have drawn, what would be the theoretical or predicted equilibrium price and
equilibrium quantity for wheat in Session 1? Peq ____ Qeq ____ In session 2? Peq___ Qeq____
[The prediction is where the Supply and Demand curves cross].
8. The actual average market price and quantity traded for each session and round is in Table 2. Did the market
process (the open outcry auctions for wheat) actually get close to the predicted prices and quantities? Do the
experimental results match what happened in the market model? Please explain your response.