What’s the Price Telling Me?

Keystone Principle #9 – Prices are Determined by the Market Forces of Supply and Demand and are Constantly Changing

Voluntary National Content Standards: #8

Connection:

Students at all levels tend to confuse price (the exchange value of a good or service) with the cost (what we give up when we choose).  And while the two can be related, they are not the same.

Price is a mechanism for sending information to producers as well as consumers. And while stable prices are desirable and can tell us many things, changing prices are just as valuable and send important messages, as well.  Whether prices are stated in terms of money, or in terms of other goods and services, as when we barter, important messages are conveyed.

For the consumer, the messages in the price are important.  The price of an item we purchase allows us to make several comparisons in making our decision to buy.  For example, if a student wants to purchase a video game with a price of $39.99, students can convert that to “weeks of allowance” or “hours on the job” (with the help of a teacher or parent).  In that case, the price of an item allows us them think about the effort required to satisfy the want.

The price also allows us to compare the item to other things we want.  An example of this would be to take the same purchase but convert it to other items we want: a present for a parent, school supplies, music downloads, or trips to the movies, etc.  By using price in this way, students can prioritize their purchases – choosing to spend or not spend depending on other wants.

And when prices change, the changes allow for even more comparisons.  With a rising price, the question is: “Do I still want to purchase the item if it means working longer or giving up other things to get it?”  With a falling price, the question is: “Should I save more or can I consume more?”

For producers, the messages in prices are equally important.  And again, it doesn’t matter whether we are talking about stable prices or changing prices. In both cases, there is a lot of information being transmitted to the producer, and a lot of choices that may be made as a result.

The price of a product, whether it be a good or service, tells the supplier whether to continue to produce at a given level, or to increase or decrease production to meet demand.  Likewise, the price of inputs for the product, whether human resources (wages for workers or labor), natural resources (prices for raw materials or intermediate goods), or capital resources (prices for new machinery or interest on borrowed funds) determine the producer’s costs.  And those costs impact the price of the final product for the consumer.  Changing prices make the producer’s choices more complex.  Higher input prices may be passed on the consumer.  But, if they are not, the producer may have to change suppliers, cut back, or change other inputs.

Objectives

I. Understanding

  • While price may allow us to better measure the cost, the price is not the cost.
  • Prices provide information to consumers about what to buy, how much to buy, and what they may have to do to satisfy wants.
  • Prices provide information to producers about what to sell, how much to sell, and how to use their resources to provide goods and services.
  • Prices provide information to producers about how to use the inputs available to them to produce goods and services.

II. Skills

Students will be able to:

  • Define vocabulary.
  • Express alternative measures of a price (hours worked, other wants, etc.)
  • Explain the difference between price and cost (opportunity cost).

Activities

I. Concept Vocabulary

  • Barter – Trading a good or service directly for another good or service, without using money or credit.
  • Capital Resources – Resources made and used to produce and distribute goods and services; examples include tools, machinery and buildings. Also known as equipment.
  • 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.
  • Entrepreneurship – A characteristic of people who assume the risk of organizing productive resources to produce goods and services; a resource.
  • Exchange – Trading a good or service for another good or service, or for money.
  • Goods – Tangible objects that satisfy economic wants.
  • Human Resources – The health, education, experience, training, skills and values of people. Also known as human capital or labor.
  • Natural Resources – “Gifts of nature” that can be used to produce goods and services; for example, oceans, air, mineral deposits, virgin forests and actual fields of land. When investments are made to improve fields of land or other natural resources, those resources become, in part, capital resources.  Also sometimes referred to as land.
  • Money – Anything that is generally accepted as final payment for goods and services; serves as a medium of exchange, a store of value and a standard of value. Characteristics of money are portability, stability in value, uniformity, durability and acceptance.
  • Opportunity Cost – The second-best alternative (or the value of that alternative) that must be given up when scarce resources are used for one purpose instead of another.
  • Price – The amount of money that people pay when they buy a good or service; the amount they receive when they sell a good or service.
  • Productive Resources – Natural resources, human resources, capital resources and entrepreneurship used to make goods and services.
  • Services – Activities performed by people, firms or government agencies to satisfy economic wants.
  • 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.
  • Wants – Desires that can be satisfied by goods, services or other resources.

II. Journals

Initial Prompt (to be done during the introduction of this monthly theme/principle):

  • What determines the seller’s price?
  • What determines the buyer’s price?
  • What might cause a buyer or seller to change their price?

General assignment:

Choose one or two of the quotations and write a journal entry of at least half a page. For K-2nd grades, you may do this exercise as part of a discussion. Or, ask the students to draw an illustration of a quotation or the monthly theme/principle.

  1. Restate the idea in your own words
  2. Say whether or not you agree with the statement,
  3. Explain why you agree or disagree
  4. Discuss how you have seen it expressed in your own life.

III. Quotations:

  1. “Between two products, equal in price, function and quality, the better looking will outsell the other.” – Raymond Loewy
  2. “Old boys have their playthings as well as young ones; the difference is only in the price.” – Benjamin Franklin
  3. “One man’s wage rise is another man’s price increase.” – Harold Wilson
  4. “Price is what you pay. Value is what you get.” – Warren Buffett
  5. “There is scarcely anything in the world that some man cannot make a little worse and sell a little more cheaply.  The person who buys on price alone is this man’s lawful prey.” – John Ruskin

Lessons

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