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Lesson Plans
It's About Supply and Demand
Overview Procedures for Teachers Organizers for Students


Procedures for teachers is divided into four sections:
Prep -- Preparing for the lesson
Steps -- Conducting the lesson
Extensions -- Additional activities


Prep

Media Components

Computer Resources:
  • Modem: 56.6 Kbps or faster.

  • Browser: Netscape Navigator 4.0 or above or Internet Explorer 4.0 or above. Macintosh computer: System 8.1 or above and at least 32 MB of RAM.

  • Personal computer (Pentium II 350 MHz or Celeron 600 MHz) running Windows® 95 or higher and at least 32 MB of RAM

  • Software: Any presentation software such as Power Point or Hyperstudio (optional)
Web Resources: TIP: Bookmark all of the Web sites used in the lesson and create a word processing document listing all of the links to distribute to students. Preview all of the sites and videos before presenting them to your class.

  • Citigroup Financial Education Curriculum
    http://www.citigroup.com/citigroup/financialeducation/curriculum/
    This site provides basic information about personal finances that everyone needs to build wealth. The curriculum provides authoritative and flexible content from which you can choose subjects and activities, including budgeting, credit, and saving and investing, that best meet your needs.

  • Jump$tart Coalition
    http://www.jumpstart.org/
    The Coalition's direct objective is to encourage curriculum enrichment to insure that basic personal financial management skills are attained during the K-12 educational experience.

Materials:

Teachers will need the following:
  • Board and/or chart paper
  • Ideally a screen on which to project the Web-based video clips
  • Handouts of Web resources if computers are not available in the classroom
  • T Shirt Organizer
  • Supply and Demand Questions
  • Copy of Episode #2, PRODUCING, from the Instructional Television (ITV) series on Economics. Cue the tape to the segment on mud pies towards the end of the episode.
Students will need the following supplies:

  • Computers with the capacities indicated above
  • Notebook or journal
  • Pens/pencils

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Steps

Introductory Activity:
(Half a class period)


  • Ask students to consider the following questions related to supply and demand:
    • Professional athletes: How much is a superstar in the NBA or WNBA (such as Shaquille O'Neal, Lebron James, Lisa Leslie, Chamique Holdsclaw) paid compared to an average player?

    • Automobiles: Do you think you'd pay more for a 1962 Corvette or a 2004 Corvette (assuming that both are in good condition)?

    • Rocks: Which costs more, diamonds or gravel?
  • Ask students why they think some items are more expensive than others. Try to lead the discussion so that students realize that rare things like superstars, antique automobiles, and diamonds are in short supply. So that students think about scarcity, you might ask questions such as, "How many superstars are there in the league, and how many average players are there?" Consequently, students should realize that the cost for the special items is usually higher, because they are harder to acquire.

    Extension:
    You may wish to tell students the following story about construction nails. Long ago, when houses made of wood were first being built, nails were very expensive. It seems funny to us today, but it's true. Each nail had to be made by hand, pounded into shape by a blacksmith. Though it wasn't difficult, it took time. Even a good blacksmith wouldn't be able to make more than a few hundred nails in an entire day. On the other hand, there are machines today that can manufacture thousands of nails an hour. Because they are so much easier to acquire now-that is, because there is a greater supply of nails-the price has dropped substantially.

    Learning Activities:

    Activity 1: Law of Supply and Demand
    (One class period)


  • Cue the ITV videotape about Production to the segment about Laura's mud pie business. This segment occurs approximately 10 minutes into the video.

  • Explain to students that the price of the pies greatly influenced the number that Laura sold, and that this is one illustration of the law of supply and demand. On the board or overhead projector, list the following terms and properties associated with this law:
    • Supply: The total amount of a good or service available for purchase; along with demand, one of the two key determinants of price. A change in the price of the product will cause a change in quantity supplied.

    • Demand: The willingness and ability of the people within a market area to purchase particular amounts of goods or services at a variety of alternative prices during a specified time period.

    • The Law of Supply and Demand: The price of an item will go down if the supply increases or if the demand for the item decreases. The price of an item will go up if the supply decreases or if the demand for the item increases. In general, the price of an item is usually pushed toward the level at which the quantity supplied will equal the quantity demanded.
  • Relate each of these terms to an example from the Introductory Activity. For instance, you might point out that the supply of superstars is low yet demand for them is high, so their price is high; in contrast, there is a greater supply of average players and the demand for them is not as high as it is for superstars, so their price is relatively low.

  • Ask students, "What effect do you think the law of supply and demand has on your life?" Encourage students to come up with ideas about how supply and demand affects the prices of items they want, such as CDs, DVDs, skateboards, and clothes. Call on 3 to 5 students to share some of their thoughts with the class.

  • On the board or overhead, display the following table of values, highlighting several cases from the video:

      Price per Mud Pie Number of Pies Sold Total Revenue
    Case #2 20˘ 5 $1.00
    Case #3 10˘ 50 $5.00
    Case #6    


  • Explain to students that other factors from the video will be ignored-such as advertising, the cost of soil, and competitors take away business. Instead, explain that in today's lesson they are only going to focus on the relationship between price and the number of pies that are sold.

  • Ask students, "How many pies do you think Laura would sell at 8˘ each?" Allow students to speculate at the number of pies that would be sold. A reasonable guess is slightly more than 50, because Laura sold 50 mud pies when the cost was 10˘. Since the price decreased, sales should increase. (Students might determine how many would be sold using the following logic: as the price increased from 10˘ to 20˘ (an increase of 10˘), the number of pies sold decreased from 50 to 5 (a decrease of 45); consequently, it seems that for each 1˘ increase in price, the number of pies sold will decrease by 4.5. Conversely, for a 1˘ decrease in price, the number of pies sold should increase by 4.5. So, for a 2˘ decrease in price (from 10˘ to 8˘), the number of pies sold should increase by 2 × 4.5 = 9, and therefore approximately 50 + 9 = 59 pies should be sold at 8˘ each.)

  • Explain to students that a graph could be used to determine the number of pies sold. The data points are (20,5) and (10,50) because 5 pies were sold at 20˘, and 50 pies were sold at 10˘. On the board or overhead, plot these points on a graph that shows cost versus number of mud pies sold.

  • Explain that a line could be used to connect the points, and then the line could be used to predict sales for prices other than 10˘ or 20˘. Draw the line on the graph, which should look something like this:



  • Require students to revise their prediction for the number of sales based on this graph. Students should be able to get a fairly accurate estimate from the graph.

  • Ask students, "How reasonable is it to use this graph to predict the number of sales?" Lead students to think about various issues, including:
    • According to the graph, how many mud pies would be "sold" when the price is 0˘? How many pies do you think would be sold at this price?

    • If the price increased beyond 22˘, do you think that any mud pies would be sold?

    • What type of graph, other than a straight line, might better represent this situation?
  • Conclude this discussion by stating that, although it may not be the best model to represent the number of sales, a straight line is an easy model to use that is probably reasonably accurate, so it will be used for the following activity.

    Activity 2: T-shirt Simulation
    (One class period)


  • Explain to students that they will design a T-shirt and collect data on how much other students would be willing to pay for the shirt.

  • Divide students into groups of three. Explain that they have four to six minutes to create a design for a T-shirt. They should draw a quick sketch of their design on the T Shirt Organizer.

  • Once shirts have been designed, allow students five minutes to survey their classmates regarding how much they would be willing to pay for various designs. On the T Shirt Organizer, students should make tick marks by each price indicating the number of students who would pay that price. For instance, if a student says that she would pay up to $12 for the shirt, a tick mark should be made on the line next to $12. If a student says that he would not buy the shirt at all, a tick mark should be made next to $0.

  • Students should then plot the data on a graph of Cost in Dollars versus Number Sold. However, it is important that students take into account that if a classmate states that they would buy the shirt for a particular price, it can be assumed that they would also buy the shirt for any price less than that. For instance, if a student says she would pay $12 for the shirt, it can be assumed that she would buy the shirt for $1, $3, $8, or any price up to $12. This should be reflected in the graph. As a result, the graph will represent a negative correlation; a possible graph is shown below.



  • When students have plotted the data, they should estimate a line of best fit; that is, they should draw a line that roughly approximates the data. As an example, a possible line of best fit is shown in the graph above.

  • Based on their graphs, students should answer the following questions:
    • How many shirts would you sell if you gave them away for free; that is, how many would you "sell" at a price of $0?

      (Answers will vary, depending on the students' data. Using the graph above, the straight line implies that approximately 40 shirts would be sold at $0. However, students should realize that the number is likely much higher-people who wouldn't be willing to pay even $1 for the shirt might be willing to take it for free. Consequently, the line is useful for modeling the situation, but it may not be completely accurate for all situations.)

    • At what price will you sell no shirts? That is, what price is higher than anyone would be willing to pay?

      (Answers will vary, depending on the students' data. Using the graph above, it appears that $18 is more than anyone would be willing to pay. Students should recognize that the x intercept represents the point at which the price is too high.)

    • For what price would you bring in the most total revenue?

      (Answers will vary. Using the graph above, it seems that the maximum revenue will occur when the price is $9; at this price, approximately 20 shirts will be sold, resulting in total revenue of 9 × 20 = $180. By comparison, 22 shirts will be sold at $8, yielding a revenue of 8 × 22 = $176; likewise, 17 shirts will be sold at $10, yielding $170. As the price decreases, more shirts are sold, but less money is earned per shirt; for example, 35 shirts would be sold at $2, but this only yields $70 total. As the price increases, more money is earned per shirt, but fewer are sold; for example, at $16, only 4 shirts are sold, yielding just $64 in revenue.)
  • The third question above is challenging to answer, and students should be allowed a few minutes to struggle with the question in their groups. You may wish to lead a brief discussion about how the total revenue could be calculated, and you should help the students to realize that revenue is equal to the product of the number of shirts sold and the price at which they are sold. For instance, using the graph above, if the shirts were sold at $10, it appears that 19 shirts would be sold; consequently, the total revenue is $10 × 19 = $190.

  • Students may use paper and pencil or a spreadsheet program to determine the price at which the maximum total revenue will be earned. Allow students three to five minutes in their groups to perform these calculations.

  • Because the calculations to determine maximum total revenue are long and tedious, explain to students that there is an easier way to find this value. Remind students that the total revenue is found by multiplying the number of shirts sold by the price at which they were sold. The number of shirts is given by the line of best fit, and students should write an equation that models the line of best fit. For example, the line of best fit in the example above passes through the points (0,40) and (18,0), so the slope of the line is



  • The y intercept of the line is 40. Therefore, a fairly accurate equation of the line of best fit is n = 2.2p + 40, where n is the number of shirts sold, and p is the selling price.

  • Have students determine the slope, y intercept, and an equation for their line of best fit.

  • Then, explain that since p represents the selling price of the shirts, the total revenue can be found by multiplying the number sold by p. This multiplication will result in a quadratic equation. For instance, using the fictitious example above, the total revenue r is given by the equation



  • Using a spreadsheet program, a graphing calculator, or paper and pencil, students should graph this quadratic equation. The vertex of the equation represents the selling price at which the maximum total revenue would be earned. For the example above, the maximum revenue is about $180 which occurs when the selling price is around $9.

  • Based on their graphs, students should determine the selling price at which revenue will be maximized.

  • To conclude this portion of the lesson, tie together all of the elements: that the demand for the shirts, as indicated by the amount that classmates would be willing to pay for them, dictates the price that should be charged. It also affects the number of shirts that should be produced; produce more shirts than will sell, and money is wasted on production and materials.

    Activity 3: Self Regulation
    (One class period)


  • Tell students that the T-shirt simulation will lead into the next portion of the lesson, in which students must determine which of the T-shirts to buy. Explain to the class that although they might be willing to pay a certain amount for a T-shirt, actually choosing to buy it will depend on a lot of other factors -- including whether they can afford it.

  • Say to the class, "To determine how much money you have to start, you will roll a die. Multiply the result by three and that will be your weekly income, in dollars."

  • Distribute dice to students. Then, have all students roll a die and figure out their beginning amount. You may choose to distribute fake money to students to make the simulation seem more realistic.

  • Based on the amount of money they have, students should now decide which of their classmate's T-shirts that they want to purchase, if any. In most cases, students will only have barely enough money to buy just one shirt, and they should consider whether it is really a necessity and worth the cost. Also discuss how a student might be able to afford a less-popular T-shirt, since low demand for the shirt might lower its cost.

  • Allow students to purchase T-shirts from their classmates. Have students keep track of how much money they have, how much they spend, and what items they purchase. If using fake money, this will take care of itself. You may also want to give the students the option to buy T-shirts on credit that they repay over time with interest (e.g., a credit card). Explain to students that by using this option they can budget their repayment over a period of time, but they will also have to pay additional interest, which will cut into their budget and spending power.

  • Now explain that students also have to be able to pay for other things they need, such as food and shelter. Explain to students that one third of their income (which was determined by the roll of the die) must be used to pay the rent. (Should students complain about this amount, explain that this percent is consistent with national data.) In addition, all students must pay $1 to pay to cover the cost of food for the week.

  • Students who spent much of their money on a T-shirt will now find themselves in trouble. For instance, if a student rolled a four, they would have $12 to spend. If they bought a T-shirt for $9, they will have just $3 left. However, their rent is $4 and food is $1, so they will not be able to afford necessities. You can also explain to the class that they may decide not to buy a T-shirt, so that they can instead save their money in some kind of interest-bearing account (eg: a savings account or some kind of investment vehicle). Explain to students that if they choose this option, their money will grow over time, so that at a later date they can afford more T-shirts, or a more expensive T-shirt.

  • Use the results from the simulation to conduct a brief discussion about needs and wants. Post the following definitions on the board or overhead projector:
    • Need: Something required; a necessity. Examples include food, water, clothes, oxygen, and shelter.

    • Want: Something desired but not required. Examples include CD's, video games, skateboards, cell phones, automobiles.
  • At this point, conduct a discussion using information from two groups.
    • The first group is the students who bought a T-shirt and then learned that they could not cover other expenses. Ask students in this group what they could do to prevent this from happening in the future. Continue to question until students realize that they should refrain from buying until all other expenses are covered; in other words, get students to realize that they need to invoke self regulation.

    • The second group is the students who had a low income and could not afford any of the T-shirts; they should have had enough to cover rent and food with a little money left over, but ask them what they would need to do to be able to buy a T-shirt. Continue to question until they realize that they should save the extra money until they have saved enough to buy the T-shirt they want.
  • On the board or overhead, post the following definition:
    • Self Regulation: Having control over your own conduct and actions.
  • At this point, allow further transactions to occur. Students who had shirts purchased from them now have extra money, and they may use it to buy shirts from other students. Allow one to two minutes for these additional sales to take place. Then, revisit the law of supply and demand. Students who sold many shirts might choose to increase the price of their shirts, given that the demand increased. Students who sold no shirts might consider lowering the price, since they need income.

  • For the second part of the simulation, tell all students that they must buy at least one shirt. Consequently, students may have to make some difficult choices-do they want to buy a really cool shirt for which they don't have enough money, or will they opt to purchase a cheaper shirt? How much will they lower the cost of their shirts to earn enough money to buy the shirt they really want? Allow students to change their prices, make additional purchases, and so on, until all students have bought at least one shirt.

  • Conclude this lesson by discussing how supply, demand, needs, and wants work together in a market economy. Allow students to explain what happened during the process, and continually relate their experiences to the terms and concepts learned during the lesson.

    Culminating Activity/Assessment:

  • In their journals, have students describe how the ideas they learned in this lesson transfer to larger life decisions, such as buying a new car versus driving a used car, or buying a non-brand name item, like jeans, an MP3 player, or a computer versus buying a name brand item (i.e. designer jeans, an Apple iPod, or a Sony Computer). Tell students to use the ideas about supply and demand as well as self regulation to explain the choices they would make when it comes time to make such decisions. Which option makes the most sense? Have the students answer the questions in the Supply and Demand Student Organizer.

  • Discuss the idea of savings with the class, and how self-regulation can involve not spending any extra money at all. Explore the idea that if a person has a spending goal (for example, they want to buy an iMac), they can forego spending money on smaller items that are "wants" rather than "needs" in order to accumulate enough money for the large financial goal.

    Extensions




    Cross-Curricular Extensions:
    • The line used in the portion for determining number of sales based on price can connect to the ideas about linear equations in math class. Specifically, they relate to ideas about rate of change-as the price increases, the number of sales decreases. A review of slope and how it is calculated might be necessary. Remind students that the slope of a straight line is the ratio of vertical change to horizontal change. The slope can be calculated by choosing two points, (x1, y1) and (x2, y2) on the line and using the following formula:



    • Students can investigate supply and demand of oil and possibly make connections between supply and demand and natural resources. Gas prices have a direct impact on many high school-aged students. Also, oil is a highly controlled market with a steady demand but a fluctuating supply, and the price responds immediately to any decisions by OPEC.

    • To help students learn the importance of setting financial goals, financial planning, and self-regulation, add an investment component to either the mud pie or T-shirt exercise. For this kind of exercise, students need to be able to decide not to spend their money, in order to save it or invest it instead. Then they can see how different interest rates impact their income's growth. They can also see how setting financial goals helps the budgeting process, especially when income is particularly scarce. The Citigroup Financial Education Curriculum includes a series of activities that will help students understand the importance of both saving and investing. http://www.citigroup.com/citigroup/financialeducation/
      curriculum/data/saveinvest_en.pdf


    • Knowing how to use credit cards wisely is also a valuable skill, since students can learn the other side of saving: paying interest to borrow money. Discuss interest with students, and remember to explain that it is necessary to pay back loans on time, that interest accrual can be expensive, and that credit history affects one's financial well-being. The Citigroup Financial Education Curriculum's credit unit can help steer students on the path toward using credit wisely: http://www.citigroup.com/citigroup/financialeducation/
      curriculum/data/credit_en.pdf


    • The Jump$tart Coalition Web site contains a searchable Clearinghouse where you can find additional lessons and activities to extend and expand upon the concepts introduced in this lesson.



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