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Henry Ford and the Model T: A Case Study in Productivity (Part 3)

Key Economic Concepts:

• Demand
• Determinants of Demand
• Determinants of Supply
• Economic Growth
• Entrepreneurship
• Equilibrium Price
• Markets
• Price
• Productivity
• Profit
• Quantity Demanded
• Quantity Supplied
• Supply

Description:

When Henry Ford announced he was going to produce an automobile that would be affordable to the masses, it is doubtful even he realized the far reaching impact such an achievement would have on life in the U.S. and eventually, the world. Ford’s use of mass production strategies to manufacture the Model T revolutionized industrial manufacturing and initiated a new era in personal transportation. This 3-part learning unit provides students with the story of Henry Ford and the Model T from an economics perspective. Parts 1 and 2 explore how the Ford Motor Company successfully introduced mass production strategies to the auto industry. Students learn how specialization and investments in capital (machines, people, etc.) increased productivity and allowed Ford to slash the price of his popular vehicle. Students chart a plan for the assembly line production of bookmarks, test their plan and make recommendations for improvements. Students also explore how Henry Ford used economic incentives to address a problem created by mass production techniques—worker turnover. An optional Part 3 explains how increased productivity resulted in shifts in the supply and demand for the Model T. Students analyze how a variety of non price determinants continue to influence the automobile market today. A wealth of extension activities is provided if additional time is available.

Lesson Objectives:

Students will:

• Describe how Henry Ford’s innovative use of large-scale production in the auto industry and explain its impact on workers, consumers, and producers.
• Analyze shifts in the market supply and demand for motor vehicles caused by nonprice determinants.
• Summarize the story of Henry Ford and the Model T from an economic perspective.

Introduction:

Part 1                   Part 2                     Part 3

Tell the students that Henry Ford changed the auto industry forever. To remain competitive, other automakers had to adopt his innovations in mass production. In Part 3, of this set of lessons, the students will analyze his efforts to increase auto productivity in the auto industry and learn how his innovations affected market supply and demand.

[NOTE: This lesson assumes that your students have been introduced to the non-price determinants of supply and demand. If this is not the case, assign your students to use the online lesson Demand Shifters [www.econedlink.org/lessons/index.php?lesson=EM550]. For the teacher version of the same lesson, click here [www.econedlink.org/lessons/index.php?lesson=EM550&page=teacher].

You may also want to distribute copies of NonPrice Determinants Cause Market Shifts. Point out that the causes of shifts in demand and supply are summarized on the handout. The graphs illustrate what would happen if there were an increase in demand or supply. The questions below will help you test student comprehension and serve as a review before you begin work on this part of the lesson.

Have students look at the demand curve that is shown on the handout.

Ask:

1. When demand increases, what happens to the demand curve? [The curve shifts right.]
2. What happens to price? [The price increases.]
3. What happens to the quantity of the good or service demanded? [The quantity increases.]

Ask the students to imagine what would happen if demand decreased instead of increasing as pictured.

More specifically:

4. What would happen to the curve if demand decreased? [The curve would shift left.]
5. What would happen to the price of the good or service? [The price would decrease.]
6. What would happen to the quantity purchased by consumers? [The quantity would also decrease.]

Explain that some events shift supply versus demand. If the students are not familiar with the nonprice determinants of supply, briefly introduce them.

• The number of producers
• The cost of production
• Profit on another product that can be made and sold by a supplier

Have the students look at the supply curve that is shown.

Ask:

1. When supply increases, which way does the curve shift? [The curve shifts right.]
2. What happens to the price? [The price decreases.]
3. What happens to the quantity of the good or service supplied? [The quantity increases, there is an inverse relationship between price and quantity.]

Ask the students to imagine what would happen if supply decreased instead of increasing.

More specifically:

4. What would happen to the curve if supply decreased? [The curve would shift left.]
5. What would happen to the price of the good or service? [The price would increase.]
6. What would happen to the quantity produced and sold? [The quantity would decrease.]

Resources:

Use this activity to assess the students' economic understanding of what they have learned about Henry Ford and the Model T. [Answers]

Process:

Have the students work at computers individually or in small groups learning how Henry Ford’s efforts to improve productivity caused changes in the market for automobiles. The students should observe that nonprice determinants caused shifts in both supply and demand. By reference to hypothetical current events, the students are asked to predict the impact of various nonprice determinants on the auto market today.

Have the students plot the information on this chart to better visualize how price affects production.

In October 1908, the first Model T Fords were sold for $950. As Henry Ford found new ways to reduce production costs, he passed the savings on to consumers as lower prices. By 1912, the car was selling for $575. It was the first time that a new car had sold for less than the average wage of U.S. workers. The price of the Model T would continue to drop during its 19 years in production, at one point dipping as low as $280. With each price cut, more and more consumers could afford to buy the cars.

This reduction in price meant that Ford's profit margins (on each Model T) decreased but its revenues increased. How was that possible? In 1909 the profit on a car was $220. By 1914, the margin had dropped to $99. But sales were exploding. While profit margins on individual cars were smaller, the added sales volume increased total profits. During this period, the company’s net income rose from $3 million to $25 million. Its U.S. market share rose from 9.4 percent in 1908 to a remarkable 48 percent in 1914.

The Changing Market for Automobiles

Henry Ford permanently changed the auto industry. To remain competitive, other automakers had to adopt his innovations in mass production.

Graph came from another EconEdLink lesson:
www.econedlink.org/lessons/index.php?lesson=EM317&page=teacher

Increased productivity made it possible for automakers to increase the number of automobiles they were willing and able to sell at different prices. The supply curve in the auto market shifted right.

Graph came from another EconEdLink lesson:
www.econedlink.org/lessons/index.php?lesson=EM317&page=teacher

Up to this point, the lesson has focused primarily on mass production, but mass consumption was just as important to Henry Ford. His $5 day forced other employers in the auto industry and other industries to follow his lead to attract and keep workers. As a result, wages for many U.S. workers increased.

The increase in wages increased consumer demand for automobiles. The demand curve shifted right as more consumers were willing and able to buy cars.

Fast forward to the automobile market today. Supply and demand for motor vehicles continues to shift. Read the following newspaper headlines and decide whether each event will have an impact on the market supply or demand for cars. If there is a change, specify whether it will be an increase or decrease.

Have the students click here for an interactive activity.

Conclusion:

Many people believe that Henry Ford invented the automobile. Others credit him with creating the assembly line. In fact, he did neither. Have the students answer the questions below in the interactive activity: 

1.  If this is the case, why is Henry Ford such an important figure in our history books? [He introduced large-scale production to the auto industry which was adopted by many other industries.]
    
2. How did workers benefit from the transition to mass production? [They were able to produce more which meant they could be paid higher wages.]
   
3. How did consumers benefit from mass production? [Reduced prices and higher incomes made it possible for consumers to buy more goods and services.]
   
4. How did producers like Henry Ford benefit? [Reduced production costs made it possible for producers to lower prices and sell more, yielding higher profits.]
   
5. Are there any costs, or negatives, that come with mass production? [Some students may note that specialized jobs-especially on an assembly line, are monotonous. Other may point out that there are fewer craftspersons available to do customized work.]

Extension Activity:

Have the students:

1. Gather news stories on events that will affect the market for automobiles. The students should tell how supply or demand will be changed, and the cause of the change, in each case.
2. Do more research on the history of the automobile and its manufacture. These articles from About.com provide a good starting point:
   a. Early SteamPowered and Electric Cars inventors.about.com/library/weekly/aacarssteama.htm ^[1]
   b. The First Gas-Powered Cars inventors.about.com/library/weekly/aacarsgasa.htm ^[1]
   c. The Start of the Assembly Line inventors.about.com/library/weekly/aacarsassemblya.htm ^[2]

Part 1

Part 2

Part 3

Links Used:

1. ^{^ ^} "The History of the Automobile" - (inventors.about.com) This site has a published article on the Early Steam Powered Cars.
2. ^{^} "The History of the Automobile" - (inventors.about.com) This site discusses the history of the automobile.

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