Gold exchange game: Demand and supply

Introduction

This fun classroom activity is an ideal way of completing the supply and demand unit. the Gold exchange is similar to a number of similar activities and can be adapted to suit the IB class that you have.  It consists of a hands on exercise for teaching your students about supply and demand.  It is an experiential learning activity that shows how buyers and sellers determine equilibrium price in a market and demonstrates how changes in a market can lead to shortages or surpluses, resulting in changes to price and quantity.  

Lesson time: 30 - 40 minutes

Introducing the activity

Start by distributing the following worksheet, available at: Gold exchange

Then divide your class into equal numbers of buyers and sellers and then explain the rules of the game which is to learn about supply and demand in action through a virtual market place.  If the numbers in your class are uneven then you may take part in the game yourself so that the number of buyers and sellers (for the first two rounds) remains even.

Round 1 - equilibrium (5 minutes)

The 'buyers' and 'sellers' will take their place on different sides of the classroom and are given instructions on how to complete their task.  For the gold sellers this is to sell the piece of gold given to them for a price above the minimum selling price.  This could be any suitable price but I typically select $50.  The allocated 'buyers' similarly have one job, which is to purchase a piece of gold from one of the sellers for a price below the allocated maximum price - typically $150.  The stark difference between the two prices will become apparent as the game progresses.

At the end of round one each student records the price that they either purchase or sell their gold for.  Buyers are awarded a score for the amount below the maximum price that they are able to purchase the gold for.  This is called 'consumer surplus'.  Similarly, each seller is awarded a score based on the price that they receive above the minimum allocated price, called 'producer surplus'.  Any seller that is unable to sell their gold will automatically be deducted the minimum price from their score while any purchaser unable to find gold is deducted the maximum price.

Purchases are confirmed with a handshake and a record of the transaction is made on the whiteboard.  Each student can only make one transaction per round.  In other words they cannot buy or sell more than once during the round. 

Instruct your students not to reveal either the minimum or maximum allocated price until the round is completed.

Your students will also keep a record of the transaction and their own producer or consumer profit on the worksheet given to them.


Note: For round 1, the surplus will be equal to total because we just started!

       Max/min price           Price you paid/bought for                      Surplus                               Total


Equilibrium price = _______________ (average gold price)

Round 2 - equilibrium (5 minutes)

For the next round everyone switches roles, with those allocated to selling in round one becoming a buyer in round two and vice versa, with the same rules as the first trading round applying.  During this round each participant cannot trade with the same person as in the first round, they must find a new purchaser / seller and again each participant must only trade once during this round. 

At the end of the 5 minute trading session each student will keep a record of the transaction and the surplus or loss made.  A copy of all transactions should be made on the front whiteboard.


       Max/min price           Price you paid/bought for                      Surplus                               Total


Equilibrium price = _______________ (average gold price).

Round 3 - shortage of supply (5 minutes)

For this round of trading you will eliminate some of the sellers, as a result of an accident in one of the largest South African gold mines, causing a shock to the supply chain.  This will be represented by some of the sellers moving over to the purchasing team.  During this round the number or buyers should outnumber the participants selling gold by a ratio of two to one.

Round three is played out with the same rules as applied during the first two rounds of trading, except with a natural shortage built in.  Remember that each participant may only trade once during this session.

At the end of this round a record of transactions will also have to be made, with a number of the purchasers facing up to a significant loss, through being unable to purchase gold and the maximum price will be deducted from their personal ledger.  This will be recorded as follows:

       Max/min price            Price you paid/bought for                     Surplus                               Total


Equilibrium price = _______________ (average gold price).

Round 4 - shortage of demand

For the final round the buyers who missed out in the previous round will get the opportunity to exact their revenge with the tables turned in round 4.  Buyers unable to purchase gold in round three should remain as purchasers, with all other participants becoming the suppliers.  In this round there will be an over supply in the market with the number of purchasers reduced due to an increase in the popularity of platinum, a substitute metal.  Once again at the end of the trading round a record of all transactions should be made.

       Max/min price            Price you paid/bought for                     Surplus                              Grand Total


Equilibrium price = _______________ (average gold price)

Final activity - review questions
  1. What was your total surplus or deficit from trading?
  2. How did the equilibrium price fluctuate during the game?
  3. Were you able to trade during every round?  If not, why?
  4. When supply is low (more buyers than sellers) what happens to the price of gold? 
  5. When demand is low (more sellers than buyers) what happens to the price of gold?
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