Keystone Principle #9 – Prices are Determined by the Market Forces of Supply and Demand and are Constantly Changing
Voluntary National Content Standards: #7, #8, #9
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 piece of clothing with a price of $75, students can convert that to “weeks of allowance” or “hours on the job.” 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.
One other aspect needs to be emphasized with students at this level. Government efforts to influence, regulate or otherwise control prices, while often instituted with the best of intentions, usually result in other problems. There are several reasons for this. First of all, because a national economy is so large and so complex, it is virtually impossible for any single agency to have sufficient and timely information to set prices that reflect the current preferences and resource situations of all consumers and producers. This leads to the second problem. By mismatching resources and/or misreading preferences, any program which is aimed at impacting the price of a good or service will, of necessity, have other impacts on other products as producers and consumers adjust their behaviors to allow for changed costs. These secondary and even tertiary effects will impact the availability of the markets for other goods and services.
Objectives
I. Understanding
- Students will explain how prices provide signals to producers and consumers to make choices.
- Students will use concepts of supply and demand to explain how artificial prices affect decisions made by producers and consumers.
- Students will explain how artificial prices (non-market) can provide lead to actions that affect other products and services.
II. Skills
Students will be able to:
- Describe price ceilings and their impact on consumers.
- Describe price ceilings and their impact on producers.
- Describe price floors and their impact on consumers.
- Describe price floors and their impact on producers.
- Describe how tariffs and other barriers affect prices.
Activities
I. Concept Vocabulary
- Competition – Attempts by two or more individuals or organizations to acquire the same goods, services, or productive and financial resources. Consumers compete with other consumers for goods and services. Producers compete with other producers for sales to consumers.
- Complement – Goods and/or services that are typically used together, such as hamburger and hamburger buns, or tennis rackets and tennis lessons.
- 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 showing the quantity of demand for a good or service at different prices.
- Equilibrium Price – The price at which the quantity demanded by buyers equals the quantity supplied by sellers; also called the market-clearing price.
- Markets – Places, institutions or technological arrangements where or by means of which goods or services are exchanged. Also, the set of all sale and purchase transactions that affect the price of some good or service.
- 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.
- Price Ceiling – A legally established maximum price that may be charged for a good or service.
- Price Floor – A legally established minimum price that may be charged for a good or service.
- Shortage – Insufficient supply to meet current demand at a given price.
- Substitute – Goods or services that may be used in place of another good or service; examples include tap water for bottled water (or vice versa) and movies for concerts (or vice versa).
- 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.
- Supply Curve – A graph showing the quantity of supply for a good or service at various prices.
- Surplus – Excess supply over demand at a given price.
- Tariff – A tax on an imported good or service
II. Journals
Initial Prompt (to be done during the introduction of this monthly theme/principle):
- Describe a time when you have been in competition for something, either against someone else, or your own prior performance at a task. Do you believe that the competition helped or hindered you in achieving your goal?
General assignment:
Choose one or two of the quotations below and write a journal entry of at least half a page.
- Restate the idea in your own words
- Say whether or not you agree with the statement,
- Explain why you agree or disagree
- Discuss how you have seen it expressed in your own life.
III. Quotations:
- “Supply always comes on the heels of demand.” Robert Collier
- “Teach a parrot the terms “supply and demand” and you’ve got an economist.” Thomas Carlyle
- “Mass demand has been created almost entirely through the development of advertising.” Calvin Coolidge
- “Competition is the keen cutting edge of business, always shaving away at costs.” Henry Ford
- “Competition brings out the best in products and the worst in people.” David Sarnoff
- “Competition is not only the basis of protection to the consumer, but is the incentive to progress.” Herbert Hoover
- “The ability to learn faster than your competitors may be only sustainable competitive advantage.” Arie de Geus
- “Manufacturing and commercial monopolies owe their origin not to a tendency imminent in a capitalist economy but to governmental interventionist policy directed against free trade…” – Ludwig von Mises
- “The price good men pay for indifference to public affairs is to be ruled by evil men.” – Plato
- “Price works so well, so efficiently, that we are not aware of it most of the time.” – Milton Friedman
- “Always think of your customers as suppliers first. Work closely with them, so they can supply you with the information you need to supply them with the right products and services.” – Susan Marthaller
Lessons
Apples Juice Up Economics (from the Powell Center Lessons)
Death of the VCR (from the Powell Center Lessons)
Yummy Competition (from the Powell Center Lessons)
Marketplace: Price Increase or Price-gouging? (an EconEdLink online lesson)
What Happened to Railroads? (an EconEdLink online lesson)
Why Does Brett Favre Make $8.5 Million? (an EconEdLink online lesson)
Was Babe Ruth Underpaid? (an EconEdLink online lesson)
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