The Prices Are Changing
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Posted June 11, 2009
Author: Andrew Pass
Posted: June 11, 2009
Updated: May 7, 2010
This lesson will help students to understand how markets are created by the interaction of buyers and sellers, what demand and supply are, what equilibrium price is, and how demand and supply interact with price changes.
- Be able to explain the concepts of supply and demand.
- Be able to explain the concepts of a market and of equilibrium price.
- Be able to explain how supply and demand interact with price changes.
- Develop a graphic organizer displaying the interdependence between supply, demand, and price.
Supply, demand, and price are three vitally important concepts in economics. These three concepts are highly interdependent and one cannot understand economics until one understands this interdependence. This lesson will help students understand that markets are created by the interaction of buyers and sellers. It also will help them understand supply, demand, and interaction of supply and demand with price (including the concept of equilibrium price).
To begin this lesson, ask the students if they've ever noticed that department stores often sell summer clothes at lower prices as the summer draws to a close. Ask the students to explain, in a quick write activity, why this might be the case (Department stores might sell summer clothing at discounted prices towards the end of the summer because they want to get rid of the clothes before all demand for the clothes disappears. They also recognize that consumers will be less willing to pay high prices for the clothes when they have a short time span in which to wear them).
Ask the students if they know what the word "supply" means (It means, "The amount of a good or service that producers are willing and able to offer for sale at each possible price during a given period of time."). Ask the students to complete this worksheet. After they have completed this work, invite several of them to share their answers with the class. The students should recognize that the owner of a computer store would want to sell his computers in order to make a profit. Towards this end, the business owner would charge the highest price that he thinks people would pay, in order to sell as many computers as possible. Insightful students might argue that a business owner might be willing to sell fewer computers if they can make a greater profit by selling fewer computers. Such an argument would be correct.
Now ask the students to work in groups of two or three and complete this worksheet. After they have completed this work, invite several of them to share their answers with the class. Help the students understand that car dealers would want to have enough cars to sell to all the people who wanted to buy them. They would not want to have so many cars, however, that they would have to reduce the price in order to sell them. Consumers, on the other hand, would want the dealers to have so many cars available that they would have to sell them for less money in order to sell them all.
Ask the students what the term "demand" means (It means, "The quantity of a good or service that buyers are willing and able to buy at all possible prices during a period of time."). Ask the students to complete this worksheet. After they have completed this work, invite several of them to share their answers with the class. The students should recognize that consumers will spend more money when their demand for a good or service is strong. In other words, they will spend more money when they really want to buy something as opposed to simply thinking it might be a nice idea. Tell the students that airlines often charge different prices for the same seat on an airplane, based on the price that individual consumers are willing to pay. The price that an individual passenger pays is determined by several different variables including how he or she orders the ticket, the length of time between the ticket purchase and the flight in question, and the date and time of the flight. Ask the students why airlines would change prices in this way. Encourage them to explain their answers (Airline officials know that different people are willing to pay different prices for airline tickets, depending on the circumstances in each case). Now ask the students if they think people have a greater demand for their tickets several months in advance of their flight or several days in advance. Ask the students what happens to the available supply of airline seats around holiday times, such as Christmas. Can airlines add many extra flights during the holidays? How does this influence the price of tickets? Encourage them to explain their opinions. Explain that airlines, like other businesses, conduct research about who is willing to pay higher fees and who is not.
Business owners want to make as much money as possible. Thus, they want demand to be high, so they can charge a higher price. Consumers want to spend as little money as possible. Thus they prefer demand to be low, so that prices will be lower.
Inform the students that in 1999 Coca-Cola tried an experiment in which it developed vending machines that could charge different prices depending on the temperature. Ask the students why officials at Coca-Cola might have thought that people would be willing to pay different prices depending on the temperature (Demand for Coke might be greater when temperatures are warmer). Ask the students what would happen to the supply of Coke in warmer weather.
Ask the students how they would have felt as a customer if they knew that Coke charged more money for its product from vending machines when it was warmer outside. Ask them to justify their answers (Explain that the Coca-Cola company did not use this price strategy for very long because their consumers thought that the company was taking advantage of them. Executives at Coca-Cola thought that their good reputation might be tarnished if they maintained this price strategy. They felt that in the end it was better for business to charge a little less for the product and maintain a good reputation). Ask the students why airlines can get away with charging different fees to different customers when Coca-Cola could not do so. Discuss answers briefly.
Here is a link to a New York Times article on the topic: www.nytimes.com
Now ask students to answer the questions on this worksheet, working in groups of two or three. After they have completed this work, reconvene the class and invite a few students to share their answers with the class. Lead a discussion in which students recognize that if customers are willing to spend greater amounts of money for a good or service (in this case, tickets to a popular sporting event), the seller can charge a higher price and still sell the good. On the other hand, if a customer will not pay the asking price for the good or service, the seller will have to lower the price in order to sell. Ask the students to think of situations in which consumers might be willing to spend more money for tickets to a sporting event. (Here is a good place to use the Super Bowl example: findarticles.com .) Urge them to explain why consumers would be willing to spend more money in these cases. Now ask the students to think of situations in which consumers would not be willing to spend as much money for tickets to a sporting event. Encourage students to explain their answers.
Explain to the students that a market exists whenever multiple buyers and sellers interact. This interaction can be informal (such as scalpers selling tickets to people outside a sporting tickets at the box office) or formal (such as buyers purchasing the tickets at the box office). Explain that the "equilibrium price" is the price at which there are just enough buyers willing to buy all of the available tickets.
For example, scalpers may try to charge a high price and not find any buyers, or they may charge a low price and find more buyers than they have tickets. The equilibrium price is the price at which there are only as many buyers willing to buy tickets as there are tickets to sell. The formal definition of equilibrium price is: "the price at which the quantity of a good that is demanded equals the quantity supplied." Now ask the students to answer the questions on this worksheet, working in groups of two or three. After they have completed this work, reconvene the class and invite students to share their answers with the class. At the end of the lesson, it may be helpful to use the diagrams located at www.investopedia.com to help the students visualize the concepts.
The students should now be able to explain the concepts of the market, supply, demand, equilibrium price, and how supply and demand interact with price. In order to test this, ask the students to respond to the prompts on this worksheet. It asks students to define the terms "Supply," "Demand," "Market," and "Equilibrium Price." It also asks them to write one or two coherent sentences explaining the relationship between supply, demand, and price.
Ask the students to develop a graphic organizer explaining the relationship between supply, demand and price. To help them get started, you may want to ask them to think about the individual relationships between demand and price, supply and price, and what happens to demand and supply when a price increases or decreases. (Note: It does not matter if the students' work resembles a traditional supply-demand graph. The students' graphic organizers, however, should demonstrate an understanding of the relationship between supply, demand, and price.)
1. Using A Letter to a Business, ask the students to write letters to a local business that they frequent, recommending that the business owner think about developing the best pricing to make the most profit. The students should recognize that in thinking about these prices, business owners should remember that different people are often willing to spend different amounts of money for the same thing. Indeed, the same person is often willing to spend different amounts of money for the same thing, at different times.
2. Using An Editorial for the Public, ask the students to write letters to a newspaper explaining that companies sometimes charge different prices to different people. In these letters, the students should offer the public advice as to how they can avoid paying prices that are too high.
3. Hold a debate in your class as to whether or not it is appropriate for companies to charge different prices to different people or to charge the same person different prices at different times.
4. Demand Shifters is an additional lesson about the concept of "demand and factors that cause demand for a good or service to change." This lesson also will help the students to recognize factors that influence their behavior as a consumers."