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