# The Ice Cream Stand

### EDUCATOR'S VERSION

This lesson printed from:

http://www.econedlink.org/e853

Posted December 2, 2009

Grades: 6-8

Author: Michael Koren

Posted: December 2, 2009

Updated: January 2, 2013

### DESCRIPTION

Students will learn about supply, demand, price, competition, and entrepreneurial skills in this lesson. They will put what they learned into action by creating an ice cream stand, to complete with other stands in the classroom.

### KEY CONCEPTS

Competition, Demand, Entrepreneurship, Price, Scarcity, Shortage, Supply, Surplus

### STUDENTS WILL

- Explain the concepts of supply and demand.
- Explain how shortages and surpluses affect prices.
- Explain how prices and quantity of products produced are determined.
- Create an ice cream stand which will compete with other ice cream stands in the classroom vying for business and trying to make money.

### INTRODUCTION

Tell the students that they will learn about the economic principles of supply, demand, price, and competition. They will read two articles describing examples of supply and demand, and the effect of supply and demand on prices. To conclude the lesson, the students will work in groups to create an ice cream stands which will sell sundaes and milkshakes. Since each group will not have enough ingredients to run its stand successfully, they will have to develop a plan to get the supplies they need from other groups. The goal for each group is to make the best sundaes and milkshakes they can at a competitive price which will turn a profit. Thus, keeping costs down is quite important. A group of adults will buy one sundae and one milkshake from each of the competing groups. Groups will be judged by the quality of the ice cream stand and the quality of the sundae and the milkshake.

### PROCESS

You will need the following materials for this lesson:

- Play money in small, easily dividable denominations
- 2 sets of markers
- Construction paper
- 6 quarts or half gallons of ice cream
- 2 bottles of caramel toppings
- 4 pints of milk
- 3 blenders for the milkshakes
- 1 package of cups which can be divided up as needed
- 1 package of bowls which can be divided up as needed
- 1 package of spoons which can be divided up as needed
- 1 package of napkins which can be divided up as needed
- 1 box of straws which can be divided up as needed
- 3 ice cream scoopers
- 3 bottles of chocolate syrup
- Straws

Begin the lesson by asking the students the following questions:

1. List five items you would like to buy if you had enough money to buy them.

2. List five items you would like to sell if you could find a buyer for these items.

3. How do you think the price for an item is established?

4. How do the producers of various items decide how many of the items to produce?

Begin the demand portion of the lesson by asking students how many World Series tickets they would be willing to buy at $20.00 each? How many would they be willing to buy at $50.00 each? At $100.00 each? At $500.00 each?

1. Ask the students what happens to the amount of something they want to buy when its price goes up. *[Usually, they will buy less of that product. Feel free to use examples**.]*

2. Ask the students what happens to quantity demanded as the price rises. * [Quantity demanded drops as price increases.]*

3. Ask the students to describe the relationship between quantity demanded and price. *[Demand for most products is sensitive to price. As prices rises, quantity demanded falls. For most items, in other words, there is an inverse relationship between price and quantity demanded. You may want to plot the data on a demand graph.]*

4. Introduce the New York Yankees example. Discuss the difficulty the Yankees have had selling their premium seats in the new stadium (some seats cost several thousand of dollars). Have the students read the article Empty Seats Make Yankees Cut Some Premium Prices .

Now it is time to move to the supply portion of the lesson.

1. Ask the students how many of them would be willing to babysit for $1.00 an hour? For $5.00 an hour? For $10.00 an hour? For $20.00 an hour? *[You may want to plot the data on a supply graph.]*

2. Ask the students what the relationship is between quantity supplied (of babysitting labor, for example) and price. [*There is a direct relationship between quantity supplied and price. As price rises, quantity supplied goes up, and vice versa.]*

3. Ask the students if it makes sense to sell a product for less than the supplier paid for it. *[Usually, this wouldn't make sense the supplier would be losing money.]*

4. Have the students read the article Economics Basics: Demand and Supply to review the principles of supply and demand.

Now tell the students that they will determine how market price is established.

1. Let's assume that at 40 cents a bottle students demand 100 bottles of soda (pop). At $1.00 a bottle, students, demand 75 bottles. At $2.00 a bottle, students demand 30 bottles. At $5.00 a bottle, students demand 2 bottles. Place this data on the graph in the Appendix.

2. Let's assume that at 40 cents a bottle, suppliers would provide no soda. At $1.00 a bottle, supplies would provide 75 bottles. At $2.00 a bottle, suppliers would provide 250 bottles. At $5.00 a bottle, suppliers would provide 500 bottles. Place this data on the graph in the Appendix.

3. After you connect the dots for demand and supply, the graph will show the market clearing price or the market equilibrium price. This is where quantity demanded equals quantity supplied. The market is cleared at this price. If price is higher than the market price, there will be a surplus in the market. If price is lower than the market price, there will be a shortage. In both instances, the market price will have to move up or down to clear the market. You should show this to the students using the graph in the Appendix. You may also want to revisit the website Economics Basics: Demand and Supply at this time.

4. Have the students visit Morrows Dump Milk To Protest Low Price to learn why farmers are deliberately dumping milk.

Discuss why farmers are doing this* [There is an oversupply of milk resulting in low milk prices. The low prices mean farmers are supplying milk and losing money. If the market price is too low to cover production costs, some producers will leave the market shifting supply on the graph to the left and raising the market equilibrium price.]*

Conduct the following activity to help the students understand the main concepts of the lesson.

1. Place the students in groups of four or five. Tell them they will create an ice cream stand. In their ice cream stands they will make sundaes and milkshakes. They will be judged on three points.

One point is the attractiveness of their stand. Another is the quality (or taste) of their sundaes. The final point is the quality (the taste) of their milkshakes. A group of four or five adults will independently judge the ice cream stands according to each point. The teacher will pay $15.00 to the team with the best stand, $15.00 to the team with the best sundae (plus the price of the sundae), and $15.00 to the team with the best milkshake (plus the price of the milkshake). Students must set a price for their sundaes and their milkshakes-a price that will allow them to make a profit. Explain that the price of the sundae and the milkshake will be a factor in deciding which one is best. Explain that the cost of making one sundae is 25 cents, plus the cost of anyy supplies the students had to buy; the cost of a making one milkshake is 35 cents, plus costs.

2. Tell the students they will need to develop a plan for obtaining all of the necessary ingredients for making their sundae and milkshake since no group will have all of the necessary ingredients. The students will need to work well as a team, divide jobs, and formulate a plan for obtaining the ingredients they need.

3. The students will have about 30 minutes to design their stand (including menus) and make their sundae and milkshake. Please distribute the following materials to each group:

- Group 1 $15.00, milk, bowls, ice cream, chocolate syrup, straws
- Group 2 $15.00, milk, caramel, chocolate syrup, spoons, ice cream
- Group 3 $15.00, blender, cups, napkins, construction paper, markers, ice cream
- Group 4 $15.00, two scoopers, blender, markers, ice cream, milk
- Group 5 $15.00, ice cream, bowls, construction paper, blender, one scooper
- Group 6 $15.00, milk, caramel, chocolate syrup, ice cream, cups

Once the students have established their stands and produced their sundaes and milkshakes, judge each ice cream stand, taste each sundae and milkshake, and award the prize money based on the criteria established.

4. Discuss with students their thoughts and experiences as they went through the activity. Discuss whether they students used money to purchase supplies or whether they traded for the supplies. Ask how much profit they were hoping to make from each sale. Tell the students awarded the money as you did.

### CONCLUSION

Tell the students they now have an idea of how price gets determined and how supply and demand are involved. In running a business such as an ice cream shop, business skills are essential. Developing a business plan is crucial to being successful in the real world. Understanding the forces of supply and demand as well as competition in the marketplace are essential to being successful in the real world.

### ASSESSMENT ACTIVITY

Ask the students to write a brief paragraph explaining how forces of supply and demand determines price. Also ask the students to write about what did or didn't make their groups successful in this activity. Finally, have the students write a paragraph explaining three or four specific ideas they learned from this lesson.

### EXTENSION ACTIVITY

Ask the students why the Cash for Clunkers program has been so successful. Ask them to explain how forces of supply and demand have worked in this program.

*[Demand for cars was quite low. By providing additional refunds, the program made new cars more affordable. The quantity demanded for cars went up as the clunkers program is a subsidy, acting to shift the demand curve to the right..]*

Ask what might happen to cars sales once the money for this program ends.

*[Sales may drop, but if car dealers are creative or if car manufacturers develop popular, fuel efficient cars, sales may not drop as much.]*

Ask the students if there are some items which people would buy no matter what the items cost.

*[Possible examples: Water, electricity, and petroleum for our cars would be some examples. Tell students that, for these items, demand is inelastic. This means that price doesn't factor into purchasing decisions very much, since the items in question are very important us. Point out that demand may be more inelastic in the short run than in the long run. For example, in the short run, high prices may not cause people to buy less gasoline but if high prices persist for a long time people may closer to work, buy a more fuel-efficient car, or use mass transit.]*