# Homegrown Demand

This material is replicated on a number of sites as part of the SERC Pedagogic Service Project
Initial Publication Date: June 25, 2010

## Summary

This exercise introduces students to the concept of a demand curve, and helps them understand how demand curves are derived. During the exercise students think about and submit the price they are willing to pay for a specific item. These prices are used to generate a demand curve. In particular, to generate the prices, the instructor auctions off three M&M packets to the highest bidders via a sealed-bid auction. The instructor enters the bids into the EconPort graphing software (see below). The data generated by the class forms a demand curve which motivates the class's introduction to demand curves.

Students often have trouble understanding that demand curves are visualizations of marginal benefits. Even when they have such an understanding, they often do not see the logic of ordering these values from highest to lowest for demand curves. This experiment helps students to grasp these concepts more readily. It also prepares students for studying (and participating in experiments about) competitive equilibrium theory and other market characteristics (e.g., taxes, price controls).

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## Learning Goals

By participating in this experiment, students should be able to learn:

1. How marginal benefits, willingness to pay, and bid prices can be arranged to construct a demand curve and why it makes sense to organize them from highest to lowest;

2. What a step function (curves) is and why later lectures and their textbook describe demand curves as straight lines;

3. Why diminishing marginal benefits for individual consumers make sense.

## Context for Use

Time Required:

1. Running each experiment takes about 10-15 minutes (for classes of 30-120);

2. Entering the data in the EconPort graphing software takes about 1-2 minutes to navigate to the page and 2-3 seconds per student to enter the data;

3. Graphs are rendered immediately;

4. The resulting discussion takes approximately 40-45 minutes to complete and can be spread across classes.

Materials:

1. An index card (or other small piece of paper) for each student in class.

2. Three "fun size" packets of M&Ms (1.69 oz). Instead of M&Ms, the professor can choose any inexpensive good for which most students would have a positive reservation price.

3. The EconPort Supply and Demand Graphing Tool at:
https://www.econport.org/content/experiments/graphtool.html

The EconPort graphing tool requires the Java software be installed on your computer. If you do not have or are unsure whether your computer currently has the Java software installed, go to https://www.java.com/en/.

Considerations:

1. Some professors prefer to run the experiment, enter the data and begin lecturing on demand in the same lecture period. Other professors prefer to run the experiment in a lecture period prior to introducing demand, entering the data between lectures, and then giving the demand lectures. In our opinion, neither approach dominates the other and thus the choice is left up to the professor;

2. If one runs the experiment prior to the lecture period, one can print or make PDFs of the classroom demand curves, which can be used as lecture handouts during the lecture.

3. In very large classes data for this exercise can be collected using clickers by asking students to enter their reservation prices using the clickers, rather than using the index cards.

## Teaching Notes and Tips

This section provides a guided discussion for the instructor to use after the experiment.

## Assessment

The following student problem could be used as part of an in-class assignment, homework set, or examination.

Sample student problem (Acrobat (PDF) 38kB Oct13 09)

## References and Resources

This activity was based on a teaching activity originally created on EconPort: http://www.econport.org/content/teaching/modules/DemandSupply.html.