A market-clearing classroom experiment.

• Author: Bohacek, Radim
• Position: Targeting Teaching

1. Introduction

   One of the most delicate tasks in teaching undergraduate micro- and macroeconomic courses is the transition from partial equilibrium models to the general equilibrium framework. At the same time, the price mechanism and the clearing of markets is crucial for students' understanding of modern economic theory. The experiment described here provides participants with an opportunity to see these economic principles in action.

   The experiment is very simple: Students receive random endowments of two goods and a simple utility function that they may maximize by trading goods with each other. The only information available to each student concerns his or her own endowment, the existence of the two goods, the utility function, and the possibility of trading with other students. Each student knows neither the total supply of the goods nor the endowments of other students. Since the individual endowments are different, utility-improving trades lead to an equilibrium, with a market-clearing price proportional to the ratio of the total endowments of both goods.

   The spontaneous behavior of students corresponds to the invisible hand of the price mechanism, which induces a truly endogenous equilibrium defined only by the total endowments and the form of the utility function. In contrast to the case for similar experiments, trading is not restricted by reservation prices or a willingness to trade being imposed on the participants. Thus, the students can personally experience the role of prices in the market-clearing process. The experiment also illustrates important economic concepts (e.g., that there is no trading in equilibrium, that the excess supply or excess demand for goods is zero, the principle of Pareto optimality). Students deepen their understanding of the classroom economy analytically through a problem set.

   The experiment provides a way of using the classroom as an artificial closed economy with many agents. It makes economic theory more approachable for students not majoring in economics or for those students who prefer collaborative learning and concrete experiences to abstract conceptualization (see the discussion in Bartlett 1996). Its positive impact on students' learning and classroom participation reflects recent evidence on learning types (Becker and Watts 1995, 1996; Lage, Platt, and Treglia 2000).

   The next section contains a description of the experiment. Section 3 summarizes experience with the experiment so far. The fourth section provides conclusions. Detailed instructions, a record sheet, and an example of a problem set can be found in the appendices.

2. The Experiment

   The market-clearing experiment is intended for intermediate micro- or macroeconomic classes with at least 20 students. Giving instructions and distributing endowments takes approximately 15 minutes (see the detailed instructions in Appendix A). The "classroom economy" clears in about 10 or 20 minutes, depending on the number of participants, the motivation of the participants, and the trading intensity. Material requirements are minimal and are enumerated in Table 1.

   Before the experiment begins, the instructor prepares endowments of two goods, such as red and green pieces of paper. The endowments are distributed by the instructor or drawn by the students from a hat. It is important that the total endowment of one color be different from that of the other and that students' individual endowments be sufficiently variable to ensure mutually beneficial trades. Table 2 displays the endowment distribution in one of the experiments run in an intermediate macroeconomic class at the University of Chicago. While students could generally observe the endowments of some of the other students, the total number of goods should not be revealed.

   After distributing the endowments, the instructor writes the following utility function on the blackboard:

   U(r, g) = rg,

   where r and g are the numbers of red and green goods, respectively, held by each student. The students write down their initial endowments and utility...