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Supply and Demand
Display understanding of Adam Smith’s insights into market behavior
Create and explain a demand table and a demand curve
Create and explain a supply table and a supply curve
Explain how the laws of supply and demand affect business
Objectives
Key VocabularyDemandElasticity of DemandIncome effectInvisible handPrice equilibriumSelf-interestShortageSpecializationSubstitution effect
SupplySurplus
***New Policy***Due to budget constraints, teachers are now
allowed to sell grades!!!Grades must remain on a bell curveOnly 3 A’s, 4 B’s, 6 C’s, 4 D’s, and 3 F’s
How much is an “A” worth?
Price # of Students Revenue
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
$200
How much is an “A” worth?
Profit Maximization ultimate goalNot a true business, grades come with no cost
Need to find the best price to maximize revenue
What price should the school charge?You have created your first demand schedule!
How much is an “A” worth?
Term Category Characteristic
Demand schedule Is a data table that shows how much of a good or service a person is ready and willing to buy at each price the market offers
Demand Is the measurement of
a person’s desire to have some good or service and the ability and willingness to pay for it
Quantity Demanded Is a measurement of how much of the good or service customers will buy, taking into account the increase or decrease in demand due to changes in price
Important terms
Is a company likely to sell more or fewer products if they lower the price?
If they lower the price and sell more units, will profits will rise or fall?
At what point should a company stop lowering the price, and why?
Applying what you know
What variety and how much of a good should they produce????Answer in the interaction between supply and
demandAdam Smith “An inquiry into the nature and
causes of wealth of nations” published 1776Many consider the founder of modern
economicsOn the next slide, what does “invisible hand”
mean
The Invisible Hand
“One of the main points of the Wealth of Nations is that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called ‘invisible hand.’ If a product shortage occurs, for instance, its price rises, creating a profit margin that creates an incentive for others to enter production, eventually curing the shortage. If too many producers enter the market, the increased competition among manufacturers and increased supply would lower the price of the product to its production cost, the ‘natural price.’”
The Invisible Hand
Download: Reading- Adam Smith’s The Wealth of NationsDuring reading, underline any terms or
sentences that you do not fully understandQuestions, comments, and concerns
The Invisible Hand
Quantity demanded for a particular product or service rises and falls depending on its priceDemand increase, price decrease and vice-
versaHow many were willing to pay $20 for an A?How many were willing to pay $100 for an A?
Industry Demand Curve
Create 12 teams of high-level managersEach team’s CEO wants recommendations on
how to price a new product the company will introduce, using demand schedule data for the industry to create a demand curve graph to present to the company’s board of directors
The board of directors is going to help set goals for company production in the coming year
Industry Demand Curve
Demand curve is a graphical representation of information from the demand table
Show Demand schedules and curvesTitle both axisData sourceLocation of data points
Represents demand at each price point
Industry Demand Curve
Download: Worksheet- Demand TablesFill out graph on worksheet based on
company informationEach group must take the demand table data
and create a poster of their demand curve on excelWhen finished write 2-3 sentences describing
the data on the curve
Industry Demand Curve
You will be analyzing your fellow peers’ demand curves
Companies analyze this information in order to make decisions about how to best operate within their own industry as well as which industries offer the most promise for future expansion
Industry Demand Curve
Does opportunity cost for buyers increase or decrease when the price of a product they are thinking about buying goes down?
Demand usually decreases as price increases, in part because of the increased opportunity costs associated with higher prices
Industry Demand Curve
Download: Worksheet- Demand Curves AnalysisUse information from the posters to answer
questions that firms regularly address as a part of doing business and making critical decisions about what and how much to produce
Demand Curve Analysis
Suggest reasons why these products and therefore their demand curves look different from the demand curves for other products
Many factors impact demand
Demand Curve Analysis
Think about the shape of the demand curves you produced in the prior activity
Why do they slope downward?As consumers we find that the utility of each
additional increment of a good or service decreases, as the amount consumed increases
In order to get the consumer to buy that additional chocolate bar, the seller would need to drop the price enough for the consumer to think it’s worth it
Impacts on Demand
Download: Worksheet- Impacts on DemandThe passages represent the two phenomena
economists see driving the curve’s downward slope: the income effect and the substitution effect
Impacts on Demand
The income effect essentially means that we will buy more when, because of a reduction in one or more prices, we feel that we are getting more for our money; and also because, when prices have been reduced, our money really does go further, allowing us to buy more goods or services with it.
When prices are lower we feel richer, and we may therefore be willing to consume more. The converse of this is also true: when prices are higher, we feel poorer (and are poorer, because our money cannot buy as much), so we buy less.
Think about the grades for sale experiment. If I lowered my price 30%, would they consider buying an A in biology as well?
Impacts on Demand
The substitution effect occurs when consumers react to price increases for one product by switching to cheaper products that are similar; or to different products that, in general, do the same job (for instance, taking a bus, not a taxi, to get somewhere). These alternative products or services are called substitutes.
Going back to the grades for sale activity, would you be willing to buy an alternative to the A, say a great letter of recommendation or even an A on a mid-term instead of an A for the whole class, if it were cheaper?
Impacts on Demand
Which of the two effects are in operation in each of the scenarios in the worksheet?Be specific in the reading with examples
Personal ExamplesDollar menuNo name clothing2 for 1 specials or BOGO
Impacts on Demand
Businesses are keenly aware of these consumer behaviors and try to react to them through the way they manage the other side of the economic interaction from the demand side: that is, supply
Impacts on Demand
The demand curve, which shows that the lower the price of a good or service, the greater the demand for that product usually is
Supply is differentthe higher the price, the greater the supply of that
productJust as consumers are always trying to get the
most for their money, so also are producers trying to sell their products for the highest price possible
When prices for a particular product go up, more of it is produced
Introduction to Supply
Imagine that everyone in the room represents all possible consumers for an mp3 player
Download: Anticipation Guide- SupplyRespond to questions with the prompt in mind
Introduction to Supply
The supply curve you will consider is the counterpart of the demand curve that you worked with earlier in analyzing consumer behavior
Usually, all else being equal, the higher the price of a good, the greater the quantity supplied by businesses
Industry Supply Curve
Download: Worksheet- Supply Schedule and Curve
Pay particular attention to the supply schedule for chocolate bars
The table showing the supply schedule for manufacturers of chocolate bars represents how the producers of chocolate bars look at the market
Industry Supply Curve
The demanding CEO from the demand curve activity is back and now wants to get a graph showing the supply curve based on the schedule above
The board will need this information to make their recommendations about production for the coming year
Industry Supply Curve
Creating the supply curve for their specific industry is very similar to creating the demand curve, with the price on the vertical axis, and the quantity supplied on the horizontal axis
Industry Supply Curve
Compare to demand curveSimilarities?Differences?
What is the force driving both of these graphs?
What might be the result if these two curves (for supply and for demand) were presented on the same graph?
Industry Supply Curve
Compare the demand curve with the supply curve for chocolate bars
Predict what should be the final price and production level of chocolate bars
Turn into the vault assignment page
Industry Supply Curve
Presentation
Supply and Demand
Using a sheet of graph paper combine the demand curve and supply curve for chocolate bars
Color the areas that mark shortage and surplus with different colored markers
Indicate the equilibrium price on the graph and record the value beneath the graph
Supply and Demand Graph
Why is it hard for a business to immediately find the equilibrium point?
Why this might lead them to over-supply the market (a surplus) or underestimate the market demand and end up having fewer products than consumer demand (shortage)?
Supply and Demand Graph
A number of factors impact both supply and demand, over which businesses have little control
No matter how accurate a supply and demand curve is, it only tells the businessperson what is going on at that moment
Supply and demand is constantly changing, business must constantly be “taking the consumers’ temperature” in order to make sure that their supply is in balance with the consumer’s demand
Supply and Demand
Go online and research the rise of hula hoops vs. the rise of silly bandz.
In 1 page compare and contrast the story of each fad product specifically focusing on the concept of supply and demand.
Double spaced, times new roman, 1" margins, include a link to the resource you used.
Assignment
Remember the buying grades activityThe changes in the demand table that they
constructed represent changes in the quantity of grades demanded at any given price
This corresponds to a shift of the demand curve along the horizontal axis
Such a change in the quantity demanded is different from changes in demand owing to price changes
Changes in Demand
For a demand curve, the lower the price, the more consumers buy; however, changes in demand curves can occur when some factor other than price causes consumers to buy different amounts of the good or service at each price than they would have bought according to the original demand curve
Changes in Demand
Factors that can shift the demand curve in this way include changes in people’s incomes or the emergence of new substitute goods
Download: Learning Guide- Changes in Demand
The graph represents a hypothetical grade sale
Changes in Demand
The first line represents the original demand curve.
The second line represents the new demand curve after the school instituted a new policy, which required a minimum GPA for graduation
Changes in Demand
The school’s adoption of this new policy caused a shift in the demand curve by generating greater demand at any given price than there would have been with the old demand curve.
This was because, as more students recognized the value of that additional A to their overall GPA, they responded by being willing to pay a higher price.
Changes in Demand
The third line represents yet another policy change, which again shifts the demand curve, but in a different way.
In this case the school now allows all students to drop their two worst class grades from their overall GPA calculation (otherwise known as grade forgiveness). Again, student demand for As changes
Changes in Demand
This is different from a change in demand in response to price changes, because the changes in policy actually shift the demand curve to the left (when the minimum graduation GPA policy is instituted); or shift the demand curve to the right (when the grade forgiveness policy comes into effect). This is quite different from moving up and down the original curve because of price changes
Changes in Demand
One of the reasons it is so difficult for businesses to find and maintain price equilibrium is that markets are constantly changing
New products are producedNew technologies are discovered and developed New fads dominate and then fade. Producer and consumer expectations change. Government policies and international events play a
role. Because of this, successful businesses are constantly studying the marketplace and the different factors that influence increases and decreases in supply and demand
Factors of Change in Supply and Demand
Because of this, successful businesses are constantly studying the marketplace and the different factors that influence increases and decreases in supply and demand
Factors of Change in Supply and Demand
Download: Scenarios- Changing Business Read the different demand and supply factors
in Key Terms: Factors of Change in Supply and Demand
Work together for 10 minutes to decide which of the factors influence the movement of supply and demand for their scenario
Factors of Change in Supply and Demand
Some markets are more stable and less prone to large swings in supply and demandInsulin
The market is made up of people and thus open to large and sudden changes just as our lives are.
The role of businesses is to try and account for changes and take fullest advantage of them when they come about
Factors of Change in Supply and Demand
Create teams of two or three and that near the beginning of this lesson you created an anticipation guide. Review your guides and fill in the “I learned” section.
Work together on the “I learned” sections, building logical conclusions from the prior class exercises.
Share your findings with the class, building a list of sound conclusions from these contributions on the board for additional class-wide review
Review
45 mins
Exam
Research and write a report on Adam Smith, his life, his economic philosophy, and his impact on modern society through the free market system.
Look for links between Smith’s personal experience and his view on how a society should organize itself around its economic relationships.
The report must draw from original source material and that one of those must be his book An Inquiry Into the Nature and Causes of the Wealth of Nations.
Enrichment
Social Sciences: pick your top 5 dream universities and then conduct research on the number of students who apply and the number of students admitted.
Take the data they have collected and explain why the forces of supply and demand may be driving up the level of competition both among students for places in the top universities and among top universities for the best and the brightest coming out of US high schools.
The report should analyze the impact of a growing US population and the increasing level of economic competition that pushes both students and parents to do everything in their power to get their kids into the best schools.
Cross-Curricular Integration
Earth Sciences: Governments and international organizations such as the United Nations have come to the conclusion that supply and demand can be used to solve the problem of global warming.
Research what is known as the “Cap and Trade” system for carbon credits that has been instituted across Europe in an effort to curb carbon dioxide emissions.
The report must cover the history of the system and the logic that underwrites it.
Include an assessment of how well the program is working and whether or not it might be instituted here in the US
Cross-Curricular Integration