In this lesson, you will explore three central concepts in economics: supply, demand, and price. If you have ever wondered how companies know what prices to charge customers, you will have a better idea after you are finished. It is impossible to fully understand any one of these concepts without understanding the other two, and so we cannot view them separately. Rather, we have to look at how they interact.
At the conclusion of this lesson you will be asked to develop a graphic organizer explaining the relationship between supply, demand, and price. Throughout this lesson, consider how you will develop this organizer.
Have you ever noticed that department stores often sell summer clothes at lower prices as the summer draws to a close? Why do you think this might be the case? Do you know what the word "supply" means? The formal definition reads as follows: "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." Please complete this worksheet.
Now, working in groups of two or three complete this worksheet.
What does the term "demand" mean? The formal definition reads as follows: "The quantity of a good or service that buyers are willing and able to buy at all possible prices during a period of time." Please complete this worksheet. 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, and the date and time of the flight. Why do you think that airlines change prices in this way?
Airline officials recognize that different people are willing to pay different prices for airline tickets. Do you think that people who are flying on business or people who are flying for vacation have a greater demand for their tickets? Why do you think so? Do you think that people have a greater demand for their tickets several months in advance of their flight or several days in advance? Why? What do you think happens to the available supply of airline seats around holiday times, such as Christmas? How does this influence the price of tickets? Explain your answers! Airlines, like other businesses, conduct research to learn to whom they can charge the higher fees and to whom they must sell tickets at lower prices.
Now, working independently, please answer the questions on this worksheet.
In 1999, Coca-Cola tried an experiment in which it developed vending machines that could charge different prices depending on the temperature. Why do you think that Coke officials might have thought that people would be willing to pay different prices depending on the temperature? Do you think that consumers might have greater demand for Coke in warmer temperatures than they would have in cooler temperatures? Why or why not? What would happen to the supply of available Coke in warmer weather, if prices were the same as in colder temperatures?
How would you have felt as a customer if you knew that Coke charged more money for its product from vending machines when it was warmer outside? Why would you have felt this way? The Coca-Cola company did not use this price strategy for very long because its 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 fort their business to charge a little less for the product and maintain a good reputation. Why do you think that airlines can get away with charging different fees to different customers but Coca-Cola could not do so?
Now think about people buying tickets to a sporting event. What would create a large demand for tickets? What would this do to the price? What would discourage demand for tickets, and what effect would that have on price? Then think about it from the supply side. What would the demand be if the seller charged a high price? What about a low price? Buyers and sellers of tickets to a sporting event provide an example of a market, because a market is simply a situation in which multiple buyers and sellers interact. A market can be informal (such as scalpers selling tickets outside of sports venue), or formal (such as buyers purchasing tickets at the venue's box office). Obviously, the box office posts a certain ticket price and expects buyers to pay that price. But how do scalpers know what price to charge? What if they picked a price, and found no buyers willing to pay it? They would lower their price. And what if they then found more buyers than they had tickets? They would raise their price. They would continue this process until they found the perfect price, called the "equilibrium price," at which there are exactly as many willing buyers as there are tickets. The formal definition of equilibrium price is: "the price at which the quantity (for example, quantity of tickets) that is demanded equals the quantity supplied." Please answer the questions on this worksheet, working in groups of two or three.
During this lesson, you have considered the meaning of the terms "supply," "demand," "market," and "equilibrium price." You have also explored the relationship between supply, demand, and price. In order to test your understanding, please complete this worksheet.
Economists love to use graphic organizers to express important ideas. Develop a graphic organizer to express the relationship between supply, demand, and price that you have learned about in this lesson. You may create any sort of graphic representation you want. To help you get started, first think about the relationship between demand and price. What happens to price as demand increases? As it decreases? Now think about supply and price. What happens to price as supply increases? As it decreases? Then consider what happens as price changes. As price increases, what happens to demand and what happens to supply? As price decreases, what happens to demand and what happens to supply?
1. Using A Letter to a Business, please write a letter to a local business owner, recommending that he or she think about developing the best pricing to make the most profit. Offer some suggestions as to how the business owner might do this.
2. Using An Editorial for the Public, please write a letter to the a newspaper editor, for inclusion in the newspaper, warning readers that companies sometimes charge different prices to different people. Offer the public advice as to how they can avoid paying prices that are too high.
3. Do you think that it is appropriate for companies to charge different prices to different people, or to charge the same person different prices at the same time? Why or why not?