Unit 4 - THE PRICE SYSTEM (11 Days)
In market economies, there is no central authority that decides how many different kinds of sandwiches are provided for lunch every day at restaurants and stores, how many loaves of bread are baked, how many toys are produced before the holidays, or what the prices will be for sandwiches, bread, and toys. Students should understand that, instead, most prices in market economies are established by interaction between buyers and sellers.
Understanding how market prices and output levels are determined helps people anticipate market opportunities and make better choices as consumers and producers. It will also help them realize that market allocations are impersonal.2
EPF.3 The student will demonstrate knowledge of the price system by
a: examining the laws of supply and demand and the determinants of each
(BUS6120.036)
Days 1 and 2 The law of demand
Day 3 The law of supply
EPF.3 The student will demonstrate knowledge of the price system by
b. explaining how the interaction of supply and demand determines equilibrium price.
(BUS6120.036)
Day 1 Bringing supply and demand together for equilibrium price
EPF.3 The student will demonstrate knowledge of the price system by
a: examining the laws of supply and demand and the determinants of each
(BUS6120.036)
Day 1 What causes demand to change?
Day 2 What causes supply to change?
Day 3 Practice
EPF.3 The student will demonstrate knowledge of the price system by
c. by describing the elasticity of supply and demand.
(BUS6120.036)
Day 1 How responsive are consumers and producers to price changes? That’s elasticity!
EPF.3 The student will demonstrate knowledge of the price system by
d. examining the purposes and implications of price ceilings and price floors.
(BUS6120.036)
Day 1 Price ceilings and floors—oh my!
Day 2 Review supply, demand, equilibrium price, determinants of supply & demand,
elasticity, price ceilings and price floors
Evaluation day
Days 1 and 2 - The law of demand
Content Knowledge
A price is what people pay when they buy a good or service, and what they receive when they sell a good or service. A market exists whenever buyers and sellers exchange goods or services. Market prices are determined through the buying and selling decisions made by buyers and sellers.
Higher prices for a good or service provide incentives for buyers to purchase less of that good
or service. Lower prices for a good or service provide incentives for buyers to purchase more of that good or service. This well-established relationship between price and quantity demanded, known as the law of demand, exists as long as other factors influencing demand do not change.2
Vocabulary
Demand – The quantity of a good or service that buyers are willing and able to buy at all possible prices during a period of time.
Demand curve – A graph used to show the data from a demand schedule. The vertical axis shows the price and the horizontal access shows the quantity demanded. A demand curve shows an inverse relationship – the curve slopes downward from left to right.
Demand schedule – A table showing the quantity demanded of a good or service corresponding to a number of prices.
Law of demand – As the price of a good or service rises (or falls), the quantity of that good or service that people are willing and able to buy during a certain period of time falls (or rises); that is, price and quantity demanded are inversely related.
Wants – Desires that can be satisfied by consuming or using a good or service.
Virginia Board of Education Framework
Demand is the willingness and ability to buy specific quantities of a good or service at different prices in a specific time period, all things remaining the same. The law of demand states that people will buy more of a good or service at lower prices and less at higher prices, if everything else remains the same. When graphing, this is known as a change in quantity demanded.
Teaching Tips
1) Create a situation where you only have a few of something desirable. Since you don’t have enough to go around, auction the items. Before you hand them out, ask if the students are happy with this outcome. If not, ask for other alternatives. Discuss.
Why do we say that a market economy uses a “price system?” In a market economy scarce resources and goods and services are allocated by price—rather than lottery, first-come-first-served, strongest person.
Who sets prices? Where do prices come from? In general, prices are set in the marketplace through the forces of supply and demand.
2) To introduce demand, introduce an item such as a candy bar. Provide a handout with a range of prices for some desirable item with some prices higher and some prices lower than the usual market price for the item. (e.g. possible prices for a candy bar: $1.75, $1.50, $1.25, 1.00, .75, .50, .25). The handout will say “For each price, how many candy bars will you buy today (cash only) if this is the price charged? Explain the “willing and able” aspect of demand. If you want to buy a candy bar today, you are “willing.” If you have the money to buy a candy bar today, you are “able.” You are not counted in the demand for the candy bar unless you are both “willing and able” to buy. (Often, students will equate want with demand. Desire or want is not the same as demand. One must actually want to buy and have the money to do so.)
Have each student complete the handout noting how many candy bars they would actually buy today at each price if the candy bars were for sale at that price. After students have completed their handouts, ask how many of them would buy candy bars at $.25. Have those students stand. Ask how many candy bars each would buy at that price. Put the total next to $.25 on the board. Go to the next higher price. Repeat. Did some customers drop out or buy fewer candy bars? Ask them why they wouldn’t buy at the higher price. (Answer: They have better things to do with their money—which means “opportunity cost”) Repeat through the prices until no one will buy and you have on the board the list of prices and the quantity demanded at each price.
Refer to the list and ask what we can observe about the relationship of price and quantity demanded. (At lower prices people will buy more. At higher prices people will buy fewer.)
Explain that this is the law of demand. So, if I can’t sell enough candy bars, and I want to sell more, one thing I can do is lower the price. If too many people want to buy, I can raise the price.
Look at the list again. If I offer the item at a price of $.50, how many could I sell, according to our data? Unfortunately I only have one. In a market economy, how do we decide who to give it to? (The buyer who is willing to give up the most to get it. We generally allocate scarce things by price.) At this point you can sell the candy bar to the student who said he/she was willing to pay the highest price.
3) We can show this same data in a picture. Use the data to derive a demand curve, explaining that each point on the curve represents their decisions to buy at each price. Explain that the price is always on the vertical axis and the quantity is always on the horizontal axis. Always label the axes. Explain that the demand curve is a picture showing that at lower prices, people will buy more.
4) Give students data to graph several demand curves for practice.
5) Have students conduct a market survey to learn how many tickets to a local high school football game (or other event) potential consumers would be willing to buy at a range of prices. Use this information to derive a demand curve.
Lessons and Resources
An explanation of the price system http://jim.com/econ/chap15p1.html.
Master Curriculum Guides in Economics: Teaching Strategies Lesson 5: Graphing Demand
Focus High School Economics Lesson 3: A Classroom Market for Crude Oil
Khan academy on the law of demand
http://www.khanacademy.org/video/law-of-demand?playlist=Microeconomics
“Supply and Demand: Lessons from Toy Fads”—includes a link to a youtube video clip that illustrates supply and demand with the hula hoop as an example: http://www.econedlink.org/lessons/index.php?lid=961&type=educator
www.youtube.com/watch?v=Ng3XHPdexNM
http://www.yadayadayadaecon.com/clip/35/ (willingness to buy)
http://www.yadayadayadaecon.com/clip/65/ (demand)
Day 3 - What is supply?
Content Knowledge
If people are having a hard time getting lawn mowing service they will begin offering to pay more to get it done. As the price rises, new people will decide that it is “worth it” to mow lawns and will enter the business. As the market price rises, people are willing to supply more of a good or service.
Higher prices for a good or service provide incentives for producers (as a whole) to make or sell more of it. Lower prices for a good or service provide incentives for producers to make or sell less of it. This relationship between price and quantity supplied is normally true as long as other factors influencing costs of production and supply do not change.2
Vocabulary
Supply – 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.
Law of Supply - Producers will produce more when they can sell at a high price and less at a low price; in other words, price and quantity supplied are directly related.
Virginia Board of Education Framework
Supply is the willingness and ability to bring to market (produce/sell) specific quantities of a good or service at different prices in a specific time period, all other things remaining the same.
The law of supply states that producers will increase the quantity supplied at higher prices and decrease the quantity supplied at lower prices, if everything else remains the same.
Teaching Tips
1) While demand represents the decisions of buyers, supply represents the decisions of sellers. Supply represents the quantity of a good or service producers are willing and able to bring to market at a range of prices. It is easier for students to relate to demand than supply because they have had many years of experience as consumers. To understand supply, one must think as a seller. It may be helpful to have students think of goods and services they have had experience producing. For example, how many cars would you wash on Saturday at $3, $5, $10, $15, $20, $30, $40? Would you supply more at a higher price or a lower price? Start thinking like a business person! At higher prices you would probably supply more car washes.
2) Ask whether any students have had baby-sitting experience. Ask about the going rate. Explain that you want to determine the supply of babysitting on Sunday night. There is going to be a neighborhood party and lots of people will need babysitters. Give out a handout that lists a variety of rates from high to low. Ask students to mark the prices at which they would be willing to babysit from 6:00 PM to 10:00 PM on Sunday night: $100, $80, $60, $40, $30, $20, $10, $5 (Some students may not be willing to babysit at any price.) Remind students they should only say yes if the are both “willing” and “able.” Willing means you want to earn money babysitting. Able means that you can and will show up on Sunday night to do it.
After students have completed the forms, start with the lowest price. Who is willing to babysit at this price? Stand up. (Probably no one will stand, unless someone loves babysitting and would do it cheaply—or is desperate for money. Some people don’t have other job opportunities and so would work cheaply.) Count and record. Move to the next price. Count and record. Students remain standing—because we assume that if they would babysit for $10, they would be even more happy to do it at a price of $20 or $50 if they could get it. As new students stand, ask why they are willing to babysit at the higher price and not the lower one. (Help them see that they have opportunity costs—studying, other jobs—and that at the lower prices their opportunity costs were too high to babysit.) Continue until you have the quantity supplied for all of the prices.
Let everyone sit down. What can we say about supply? (At high prices producers will supply more.) Discuss why more students will babysit at high prices than at low ones.
3) Use the data to derive a supply curve. What does the supply curve show? (Producers will supply more at higher prices.) Explain that this is what supply curves nearly always look like—upward sloping to the right.
4) Provide data so that students can practice drawing supply curves.
5) Understanding the workings of supply and demand is critical to understanding how a market economy works. And, it will come up repeatedly in this course. Take enough time to be sure students get it.
Lessons and Resources
Master Curriculum Guides in Economics: Teaching Strategies 5-6 Lesson 9: Producers and Supply
Khan academy on the law of supply
http://www.khanacademy.org/video/law-of-supply?playlist=Microeconomics
Video
http://www.yadayadayadaecon.com/clip/70/ (willingness to sell)
Day 1 - Bringing supply and demand together for equilibrium price
Content Knowledge
Understanding supply and demand is vital to understanding how a market economy works—how prices and wages are determined. Why do tickets to the Super Bowl cost so much more than seats to a regular football game in the same stadium? Why does a brain surgeon earn so much more than a restaurant dishwasher? Supply and demand.