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VCEE Scope & Sequence EPF Unit 4

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UNIT 4The Price System (11 days)

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Unit 4 - THE PRICE SYSTEM (11 Days)All teaching resources in this document are free for teachers. Here is how to you access them:1. Many are hyperlinked in the document, so you can get started right away. 2. Lessons that do not have a hyperlink can be found on the lesson plan resource calledVirtual Economics 4.5 or 5.0 (VE). All teachers can and should get this resource for freeby participating in a VCEE training session. Visit www.vcee.org for more information.3. Lessons from Financial Fitness for Life are on VE. They also have educationaltechnology tools that can be found here:https://www.econedlink.org/resources/collection/fffl-9-12/In market economies, there is no central authority that decides how many different kinds ofsandwiches are provided for lunch every day at restaurants and stores, how many loaves of breadare baked, how many toys are produced before the holidays, or what the prices will be forsandwiches, bread, and toys. Students should understand that, instead, most prices in marketeconomies are established by interaction between buyers and sellers.Understanding how market prices and output levels are determined helps people anticipatemarket opportunities and make better choices as consumers and producers. It will also help themrealize that market allocations are impersonal.2EPF.3 The student will demonstrate knowledge of the price system bya: examining the laws of supply and demand and the determinants of eachDays 1 and 2 The law of demandDay 3 The law of supplyEPF.3 The student will demonstrate knowledge of the price system byb. explaining how the interaction of supply and demand determines equilibrium price.Day 1 Bringing supply and demand together for equilibrium priceEPF.3 The student will demonstrate knowledge of the price system bya: examining the laws of supply and demand and the determinants of eachDay 1 What causes demand to change?Day 2 What causes supply to change?Day 3 PracticeEPF.3 The student will demonstrate knowledge of the price system byc. by describing the elasticity of supply and demand.Day 1 How responsive are consumers and producers to price changes? That’s elasticity!EPF.3 The student will demonstrate knowledge of the price system byd. examining the purposes and implications of price ceilings and price floors.Day 1 Price ceilings and floors—oh my!Day 2 Review supply, demand, equilibrium price, determinants of supply & demand,elasticity, price ceilings and price floors1Virginia Council on Economic Education

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Evaluation day2Virginia Council on Economic Education

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EPF.3 The student will demonstrate knowledge of the price system bya: examining the laws of supply and demand and the determinants of eachDays 1 and 2 - The law of demandContent KnowledgeA price is what people pay when they buy a good or service, and what they receive when theysell a good or service. A market exists whenever buyers and sellers exchange goods or services.Market prices are determined through the buying and selling decisions made by buyers andsellers.Higher prices for a good or service provide incentives for buyers to purchase less of that goodor service. Lower prices for a good or service provide incentives for buyers to purchase more ofthat good or service. This well-established relationship between price and quantity demanded,known as the law of demand, exists as long as other factors influencing demand do not change.2VocabularyDemand – The quantity of a good or service that buyers are willing and able to buy at allpossible prices during a period of time.Demand curve – A graph used to show the data from a demand schedule. The vertical axisshows the price and the horizontal access shows the quantity demanded. A demand curve showsan inverse relationship – the curve slopes downward from left to right.Demand schedule – A table showing the quantity demanded of a good or service correspondingto a number of prices.Law of demand – As the price of a good or service rises (or falls), the quantity of that good orservice that people are willing and able to buy during a certain period of time falls (or rises); thatis, price and quantity demanded are inversely related.Wants – Desires that can be satisfied by consuming or using a good or service.Virginia Board of Education FrameworkDemand is the willingness and ability to buy specific quantities of a good or service at differentprices in a specific time period, all things remaining the same. The law of demand states thatpeople will buy more of a good or service at lower prices and less at higher prices, if everythingelse remains the same. When graphing, this is known as a change in quantity demanded.Teaching Tips1) Create a situation where you only have a few of something desirable. Since you don’t haveenough to go around, auction the items. Before you hand them out, ask if the students are happywith this outcome. If not, ask for other alternatives. Discuss.3Virginia Council on Economic Education

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Why do we say that a market economy uses a “price system?” In a market economy scarceresources and goods and services are allocated by price—rather than lottery,first-come-first-served, or the strongest person.Who sets prices? Where do prices come from? In general, prices are set in the marketplacethrough the forces of supply and demand.2) To introduce demand, introduce an item such as a candy bar. Provide a handout with a rangeof prices for some desirable item with some prices higher and some prices lower than the usualmarket price for the item. (e.g. possible prices for a candy bar: $1.75, $1.50, $1.25, 1.00, .75, .50,.25). The handout will say “For each price, how many candy bars will you buy today (cash only)if this is the price charged? Explain the “willing and able” aspect of demand. If you want to buya candy bar today, you are “willing.” If you have the money to buy a candy bar today, you are“able.” You are not counted in the demand for the candy bar unless you are both “willing andable” to buy. (Often, students will equate want with demand. Desire or want is not the same asdemand. One must actually want to buy and have the money to do so.)Have each student complete the handout noting how many candy bars they would actually buytoday at each price if the candy bars were for sale at that price. After students have completedtheir handouts, ask how many of them would buy candy bars at $.25. Have those students stand.Ask how many candy bars each would buy at that price. Put the total next to $.25 on the board.Go to the next higher price. Repeat. Did some customers drop out or buy fewer candy bars? Askthem why they wouldn’t buy at the higher price. (Answer: They have better things to do withtheir money—which means “opportunity cost”) Repeat through the prices until no one will buyand you have on the board the list of prices and the quantity demanded at each price.Refer to the list and ask what we can observe about the relationship of price and quantitydemanded. (At lower prices people will buy more. At higher prices people will buy fewer.)Explain that this is the law of demand. So, if I can’t sell enough candy bars, and I want to sellmore, one thing I can do is lower the price. If too many people want to buy, I can raise the price.Look at the list again. If I offer the item at a price of $.50, how many could I sell, according toour data? Unfortunately I only have one. In a market economy, how do we decide who to give itto? (The buyer who is willing to give up the most to get it. We generally allocate scarce things byprice.) At this point you can sell the candy bar to the student who said he/she was willing to paythe highest price.3) We can show this same data in a picture. Use the data to derive a demand curve, explainingthat each point on the curve represents their decisions to buy at each price. Explain that the priceis always on the vertical axis and the quantity is always on the horizontal axis. Always label theaxes. Explain that the demand curve is a picture showing that at lower prices, people will buymore.4) Give students data to graph several demand curves for practice.4Virginia Council on Economic Education

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5) Have students conduct a market survey to learn how many tickets to a local high schoolfootball game (or other event) potential consumers would be willing to buy at a range of prices.Use this information to derive a demand curve.Lessons and ResourcesMaster Curriculum Guides in Economics: Teaching Strategies Lesson 5: Graphing DemandFocus High School Economics Lesson 3: A Classroom Market for Crude OilOnlineEconEdLink, The Lesson on the Supply and Demand of Toy Fads—includes a link to a youtubevideo clip that illustrates supply and demand with the hula hoop as an example:https://www.econedlink.org/resources/a-lesson-on-the-supply-and-demand-of-toy-fads/VideosThe Hudsucker Proxy: Hula Hoop Crazewww.youtube.com/watch?v=Ng3XHPdexNMEconomic Lowdown - Episode 2, Demand (6:53)https://www.youtube.com/watch?v=LqOzRAVOV9oWe The Economy - Supply and Dance, Manhttps://wetheeconomy.com/films/supply-and-dance-man/?autoplay=noKhan academy on the law of demand (8:15)http://www.khanacademy.org/video/law-of-demand?playlist=MicroeconomicsDay 3 - What is supply?Content KnowledgeIf people are having a hard time getting lawn mowing service they will begin offering to paymore to get it done. As the price rises, new people will decide that it is “worth it” to mow lawnsand will enter the business. As the market price rises, people are willing to supply more of agood or service.Higher prices for a good or service provide incentives for producers (as a whole) to make or sellmore of it. Lower prices for a good or service provide incentives for producers to make or sellless of it. This relationship between price and quantity supplied is normally true as long as otherfactors influencing costs of production and supply do not change.2Vocabulary5Virginia Council on Economic Education

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Supply – The amount of a good or service that producers are willing and able to offer for sale ateach possible price during a given period of time.Law of Supply - Producers will produce more when they can sell at a high price and less at alow price; in other words, price and quantity supplied are directly related.Virginia Board of Education FrameworkSupply is the willingness and ability to bring to market (produce/sell) specific quantities of agood or service at different prices in a specific time period, all other things remaining the same.The law of supply states that producers will increase the quantity supplied at higher prices anddecrease the quantity supplied at lower prices, if everything else remains the same.Teaching Tips1) While demand represents the decisions of buyers, supply represents the decisions of sellers.Supply represents the quantity of a good or service producers are willing and able to bring tomarket at a range of prices. It is easier for students to relate to demand than supply because theyhave had many years of experience as consumers. To understand supply, one must think as aseller. It may be helpful to have students think of goods and services they have had experienceproducing. For example, how many cars would you wash on Saturday at $3, $5, $10, $15, $20,$30, $40? Would you supply more at a higher price or a lower price? Start thinking like abusiness person! At higher prices you would probably supply more car washes.2) Ask whether any students have had baby-sitting experience. Ask about the going rate. Explainthat you want to determine the supply of babysitting on Sunday night. There is going to be aneighborhood party and lots of people will need babysitters. Give out a handout that lists avariety of rates from high to low. Ask students to mark the prices at which they would be willingto babysit from 6:00 PM to 10:00 PM on Sunday night: $100, $80, $60, $40, $30, $20, $10, $5(Some students may not be willing to babysit at any price.) Remind students they should onlysay yes if the are both “willing” and “able.” Willing means you want to earn money babysitting.Able means that you can and will show up on Sunday night to do it.After students have completed the forms, start with the lowest price. Who is willing to babysit atthis price? Stand up. (Probably no one will stand, unless someone loves babysitting and woulddo it cheaply—or is desperate for money. Some people don’t have other job opportunities and sowould work cheaply.) Count and record. Move to the next price. Count and record. Studentsremain standing—because we assume that if they would babysit for $10, they would be evenmore happy to do it at a price of $20 or $50 if they could get it. As new students stand, ask whythey are willing to babysit at the higher price and not the lower one. (Help them see that theyhave opportunity costs—studying, other jobs—and that at the lower prices their opportunitycosts were too high to babysit.) Continue until you have the quantity supplied for all of theprices.Let everyone sit down. What can we say about supply? (At high prices producers will supplymore.) Discuss why more students will babysit at high prices than at low ones.6Virginia Council on Economic Education

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3) Use the data to derive a supply curve. What does the supply curve show? (Producers willsupply more at higher prices.) Explain that this is what supply curves nearly always looklike—upward sloping to the right.4) Provide data so that students can practice drawing supply curves.5) Understanding the workings of supply and demand is critical to understanding how a marketeconomy works. And, it will come up repeatedly in this course. Take enough time to be surestudents get it.Lessons and ResourcesMaster Curriculum Guides in Economics: Teaching Strategies 5-6 Lesson 9: Producers andSupplyVideosEconomic Lowdown - Supply, Ep. 1 (3:56)https://www.youtube.com/watch?v=6Q_XxwqtwxYMarginal Revolution University - The Supply Curve (2:54)https://www.mruniversity.com/courses/principles-economics-microeconomics/supply-curve-definition-exampleKhan academy on the law of supply (8:23)http://www.khanacademy.org/video/law-of-supply?playlist=Microeconomics7Virginia Council on Economic Education

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EPF.3 The student will demonstrate knowledge of the price system byb. explaining how the interaction of supply and demand determines equilibrium price.Day 1 - Bringing supply and demand together for equilibrium priceContent KnowledgeUnderstanding supply and demand is vital to understanding how a market economy works—howprices and wages are determined. Why do tickets to the Super Bowl cost so much more thanseats to a regular football game in the same stadium? Why does a brain surgeon earn so muchmore than a restaurant dishwasher? Supply and demand.Both buyers and sellers respond to price changes. When prices change, buyers change thequantity they are willing and able to buy and sellers change the quantity they are willing and ableto bring to market. A graph of the supply and demand curves illustrates these changes. For manystudents, using a supply and demand graph is the most valuable tool for understanding theseimportant concepts —because it creates a “picture” that helps to predict or explain prices in themarketplace.Neither supply nor demand alone can set the price. Price is determined by the interaction ofsupply and demand—working much like a pair of scissors. Where the supply curve and demandcurve intersect, the market is in balance—equilibrium. Everyone who wants to sell at that pricecan sell. Everyone who wants to buy at that price can buy. It’s called the market clearing orequilibrium price for a good or service. It is the one price at which quantity supplied equalsquantity demanded.Markets are always moving toward an equilibrium. If a price is above the market clearing price,it will eventually fall, causing sellers to produce less and buyers to purchase more; if it is belowthe market clearing price, it will eventually rise, causing sellers to produce more and buyers topurchase less.2VocabularyEquilibrium price – The price at which the quantity demanded by buyers equals the quantitysupplied by sellers; also called the market-clearing price.Equilibrium quantity – The quantity demanded and quantity supplied at the equilibrium ormarket-clearing price.Price – The amount of money that people pay when they buy a good or service; the amount theyreceive when they sell a good or a service.Shortage - The situation that results when the quantity demanded for a product exceeds thequantity supplied. Generally happens because the price of the product is below the marketequilibrium price.Surplus - The situation that results when the quantity supplied of a product exceeds the quantitydemanded. Generally happens because the price of the product is above the market equilibriumprice.8Virginia Council on Economic Education

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Virginia Board of Education FrameworkA market exists when buyers and sellers exchange goods and services. Market prices aredetermined through the buying and selling decisions made by buyers and sellers.The equilibrium price of a good or service is the one price at which quantity supplied equalsquantity demanded. Equilibrium price and quantity are revealed on a supply-and-demand graphwhere the supply and demand curves intersect.If the price is above the equilibrium price, buyers will purchase less than is available, andsuppliers will offer more, creating a surplus. When a surplus exists, prices will decrease untilthey reach the equilibrium price. If the price is below the equilibrium price, buyers will want tobuy more than is available, and suppliers will want to supply less. This will result in a shortage.Buyers will bid the price up until it reaches equilibrium price.Teaching Tips1) We say that prices are determined by supply and demand, but how can we show that?Provide students the following information on quantity demanded and quantity supplied gatheredfrom a market survey for a student organized carwash.PriceQuantity suppliedQuantity demanded$30600$25505$204010$153015$122020$8540$5060Have students work in pairs to graph both the supply and demand curves on one graph. Remindthem to label the demand curve “D” and the supply curve “S.” Be sure to label the vertical axiswith “P” for price and the horizontal axis “Q” for quantity. Labeling is essential. Withoutlabeling it is easy to get confused.2) Draw the students’ attention to the point where the supply and demand curves intersect. Tellthem to draw a broken line to the vertical axis. That is the equilibrium price ($12). Draw abroken line to the horizontal axis. That is the equilibrium quantity (20). At this price the marketis at equilibrium. There are no unsatisfied customers as no customers would be willing and ableto purchase more at this price; and there are no disappointed producers as they would not bewilling and able to produce more at this price.9Virginia Council on Economic Education

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3) Provide additional opportunities for students to practice drawing supply and demand curvesand finding the equilibrium price and quantity.4) Optional: If the school is involved in a fundraising project, have students conduct a marketsurvey to determine the quantities consumers would buy at various prices. This will show howsupply and demand are used in the real world.5) Assign students to investigate the price for a 30-second advertising spot placed during themost recent Super Bowl and make a list of companies that bought spots. Have students write aparagraph explaining how the price of ads is determined and why businesses would pay thoseprices.Lessons and ResourcesEconomics in Action Lesson 7: A Market in Wheat (This simulation shows how the marketfinds the equilibrium price.)Master Curriculum Guides in Economics: Teaching Strategies 5-6 Lesson 13: Mind Your P’sand Q’sOnlineEconEdLink, Economics in the HeadlinesUses news articles to illustrate changes in supply and demand and how equilibrium price will beaffected.https://www.econedlink.org/resources/economics-in-the-headlines/VideosEconomic Lowdown - Equilibrium, Ep. 3 (5:26)https://www.stlouisfed.org/education/economic-lowdown-video-series/episode-3-equilibriumJodiecongirl - Microeconomics Practice Problem - Economic Equilibrium and Demand andSupply Schedules (12:47)http://www.youtube.com/user/jodiecongirl#p/c/22785443C5FB0F83/20/05_oTFlrYekKhan academy on equilibrium price (10:16)http://www.khanacademy.org/video/market-equilibrium?playlist=MicroeconomicsMarginal Revolution University - The Equilibrium Price and Quantity (4:50)https://www.mruniversity.com/courses/principles-economics-microeconomics/equilibrium-price-supply-demand-exampleMJMFoodie - Episode 14: Equilibrium (5:12)http://www.youtube.com/watch?v=W5nHpAn6FvQ10Virginia Council on Economic Education

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Day 1 - What causes demand to change?Content KnowledgeThe law of demand tells us that people will buy more if we lower our price –which is why storesput things on sale. This is called a change in quantity demanded.But sometimes we buy more or less of something when the price hasn’t changed. When you geta raise, you might go to the movies more. When the price of hot dogs goes up, you might buyfewer buns. When a famous athlete wears a certain shoe, more people may decide to buy it.These are examples of changes in demand. Demand for a product changes when there is achange in consumers’ incomes, preferences, the prices of related products, or in the number ofconsumers in a market. These factors are called the determinants of demand.A key point for graphing is to distinguish between a change in demand and a change in quantitydemanded. A change in the price of a product results in a change in quantity demanded andcauses a movement along the demand curve. A change in demand results from one of thedeterminants of demand and causes the whole demand curve to shift—to the right if it is anincrease and to the left if it is a decrease.VocabularyDeterminants of Demand Factors other than the price of a good or service that change (shift)the demand schedule, causing consumers to buy more or less at every price. Factors includeincome, number of consumers, preferences and prices of related goods.Virginia Board of Education FrameworkThe law of demand states that people will buy more of a good or service at lower prices and lessat higher prices, if everything else remains the same. When graphing, this is known as a changein quantity demanded.Determinants of demand can change demand. A change in demand results from● a change in consumers’ incomes● a change in consumers’ preferences● a change in the prices of related goods or services (complements or substitutes)● a change in the number of consumers in a market● a change in the expectations of buyers.When graphing, this is known as a change in demand.Changes in supply or demand are illustrated by shifts in the supply or demand schedule (curve).These changes will affect the equilibrium price and /or equilibrium quantity.12Virginia Council on Economic Education

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Teaching Tips1) This is a key point. Review the supply and demand curves to be sure that students understandthat a change in the price of the product itself will be shown as a movement along the supply ordemand curve—not a shift in the curve.2) Explain that the demand curve is like a snapshot of the demand for a good or service at aparticular point in time—ceteris paribus. Ceteris paribus is a Latin phrase which means all thingsremain the same. So, the demand curve says, these will be the quantities that people will demandat these prices…if nothing else changes. But, sometimes, things change. The types of things thatcan change and affect demand are called the determinants of demand.3) Go over each determinant and give examples.What are the types of things that affect consumers’ tastes and preferences? (for example, fads;fashion; information about the product's healthfulness)Complements are things that go together—hot dogs and buns, cars and gasolineExamples of substitutes: Coke and Pepsi; pizza from Pizza Hut versus Dominos---burger fromWendys or McDonaldsNumber of consumers: the World Series brought more consumers to St. Louis in 2011.Population changes cause shifts in demand for different products, such as nursing home care.Expectation of rising prices makes people buy now and vice versa.4) Give students market survey data for a graph that represents the demand for certain shoesbefore an ad campaign and demand after a famous person has begun endorsing the shoes.PriceBeforeAfter$10005$90510$801015$701520$602030Have students graph the numbers in the before column and mark that demand curve “D”Then graph the numbers in the after column and mark that demand curve “D1”Explain that this is called a change in demand; we say the demand curve has shifted to the right.13Virginia Council on Economic Education

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5) Introduce and give examples for all of the determinants of demand. It’s important for studentsto learn the determinants of demand so that when they hear events in the news they cananticipate what is going to happen to prices in the marketplace.6) Give students many opportunities to practice interpreting causes for changes in demand andshifting demand curves.7) Ask students in groups to complete the table below. Tell them to think of an example of acondition/headline that could change the demand for car washes using four of the determinantsof demand and then:o indicate whether demand would increase or decreaseo indicate which direction the demand curve would shifto indicate what would happen to equilibrium price and quantity.Determinant ofDemandEvent/News StoryDemand(increases ordecreases)Demand Curveshifts left (L) orright (R)?EquilibriumPrice(Up or down?)Equilibrium QuantityDemanded(Up or down?) Be certain that students can distinguish between a change in quantity demanded that resultsfrom a change in the good or service itself, and a change in demand, which results from achange in one of the determinants of demand. Students should know how to shift the demandcurve to show an increase or decrease in demand and show how that will affect the equilibriumprice and equilibrium quantity.Lessons and ResourcesAP Macroeconomics Unit 1, Lesson 4: Demand Curves, Movements Along Demand Curvesand Shifts in Demand CurvesCapstone Lesson 12: How Do Prices Influence My Behavior?Capstone Lesson 13: How Markets Allocate Resources?OnlineEconEdLink, Demand ShiftersHow non-price determinants of demand shift the demand curve.14Virginia Council on Economic Education

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https://www.econedlink.org/resources/demand-shifters/VideosACDCLeadership - Shifting Demand and Supply (4:5)https://www.youtube.com/watch?v=V0tIOqU7m-c&list=PL6B2DBE4C2FC8F845&index=7KK Fung - Lemonade Economics - Demand vs Quantity Demanded (2:35)http://www.youtube.com/watch?v=JG8PpJxpVvo&feature=relatedMarginal Revolution University - The Demand Curve Shifts (13:59)https://www.mruniversity.com/courses/principles-economics-microeconomics/demand-curve-shiftsDay 2 - What causes supply to change?Content KnowledgeThe law of supply tells us that sellers will bring more to market at higher prices—it’s only athigher gasoline prices that oil companies can afford to build more offshore oil rigs. This is calleda change in quantity supplied.However, businesses may supply more or less of something when the market price hasn’tchanged at all. The supply of gasoline will increase if more companies drill for and strike oil.And, if the price of cotton fabric goes up this will increase the cost of making cotton sheets, somanufacturers will supply fewer cotton sheets at the old market price than they did before.When Cyrus McCormick invented the combine farmers were able to greatly increase theirproductivity—so more wheat was supplied to market at the old price. In fall 2011, certainmedications were not available in the marketplace because producers found it more profitable tomake other drugs. When more and more restaurants build in an area, this increases the supply ofrestaurant food. These are examples of changes in supply. Supply of a product changes whenthere are changes in either the prices of the productive resources used to make the product, thetechnology used to make the product, the profit opportunities available to producers from sellingother products, or the number of sellers in a market. These factors are called determinants ofsupply.A key point for graphing is to distinguish between a change in quantity supplied and a change insupply. A change in the price of the product itself will bring a change in quantity supplied andwill be shown on a graph as a movement to a different point on the same supply curve. A changein one of the determinants of supply will bring a change in supply and that will be represented bya shift in the whole supply curve—to the right if it is an increase in supply and to the left if it is adecrease.Vocabulary15Virginia Council on Economic Education

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Determinants of Supply --Factors other than the price of a good or service that change (shift)the supply schedule, causing producers to supply more or less at every price. Factors includenumber of producers, production costs, and technology and productivity.Virginia Board of Education FrameworkThe law of supply states that producers will increase the quantity supplied at higher prices anddecrease the quantity supplied at lower prices, if everything else remains the same. Whengraphing supply and demand, this is known as a change in quantity supplied.Determinants of supply can change supply. A change in supply results from● changes in the prices of productive resources used to make the good or the service● changes in the technology used to make the good or the service● changes in the profit opportunities available to producers by selling other goods orservices● changes in the number of sellers in a market● changes in the expectations of producers.When graphing, this is known as a change in supply.Teaching Tips1) This is a key point. Review the supply and demand curves to be sure that students understandthat a change in the price of the product itself will be shown as a movement along the supply ordemand curve—not a shift in the curve.2) Give students market survey data for a graph that represents the supply of babysitters thisweekend before it is announced that a big concert is coming in and wants to hire students for $15per hour.Have students graph the numbers in the “before” column and mark that supply curve “S”Then graph the numbers in the “after” column and mark that demand curve “S1”Price per hourBeforeAfter$203011$15209$12157$8105$552Explain that this is called a change in supply. Ask if the curve shifts to the right or to the left.(left) Ask if it’s an increase or decrease in the supply of babysitting services (decrease).16Virginia Council on Economic Education

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3) Introduce and give examples for all of the determinants of supply. It’s important for studentsto learn the determinants of supply so that when they hear things in the news they can anticipatewhat is going to happen to prices in the marketplace. For example: “A freeze has destroyed 50%of the orange crop in Florida.” “The price of jet fuel has increased by 50%.”4) Provide students lots of examples and opportunities to practice this. Be sure students arecomfortable with this topic before moving on.Lessons and ResourcesMaster Curriculum Guides in Economics: Teaching Strategies -5-6 Lesson 9: Producers andSupply; Lesson 10, Supply ChangesvideosKhan academy - Factors Affecting Supply (6:57)http://www.khanacademy.org/video/factors-affecting-supply?playlist=MicroeconomicsMarginal Revolution University - The Supply Curve Shifts (12:14)https://www.mruniversity.com/courses/principles-economics-microeconomics/supply-curve-shift“Explorations in Economic Supply”: This three-part lesson uses blue jeans prices to teach theelements (determinants) affecting pricing.https://www.unomaha.edu/college-of-business-administration/center-for-economic-education/teacher-resources/6-8/demand-and-supply-online.pdfDay 3 - Practice/ReviewWhat happens in one market affects other markets. The lesson “How Markets AllocateResources” will show whether students really understand how supply and demand work in themarketplace.Capstone, Unit 2 lesson 13: How Markets Allocate Resources17Virginia Council on Economic Education

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Day 1 - How responsive are consumers and producers to pricechanges? That’s elasticity!Content KnowledgeYou know that the law of demand says that at lower prices people will buy more—and viceversa. So you decide to run a special on insulin in your drug store. Do you think you would sella lot more insulin? The answer is “no”: people aren’t going to increase their usage of insulinbecause it is cheaper. In economics terms we would say that the demand is inelastic—not veryresponsive to price changes. Increase the price of insulin and people will continue to buy aboutthe same amount.Other products are very responsive to price changes. Raise the price of CocaCola by 20% and thequantity demanded will likely fall more than 20%. Why? Because consumers have many othersubstitute drinks. So, we say the demand is elastic—responsive to price changes.Understanding elasticity is useful in business because it may not be profitable to lower the priceof a product where the demand is inelastic whereas it may be profitable to increase it. It may beprofitable to lower the price on products where demand is elastic—because you would sell more.These ideas are also useful in school—when setting ticket prices to dances as well as prices forbake sales and car washes.VocabularyElasticity of Demand - Price elasticity of demand is the percentage change in quantitydemanded as a result of the percentage change in demand price. Generally, a relative response ofa change in quantity demanded to a relative change in price.Elasticity of Supply - Price elasticity of supply is the percentage change in quantity supplied asa result of the percentage change in demand price. Generally, a relative response of a change inquantity supplied to a relative change in price.Virginia Board of Education FrameworkElasticity describes the degree to which buyers and sellers respond to price changes.18Virginia Council on Economic Education

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The more elastic supply or demand, the more responsive consumers and producers are to pricechanges (e.g., prices go up 10% and quantity demand goes down by 20%).The more inelastic supply or demand, the less responsive producers are to price changes.Price inelasticity means that consumers or producers are not very responsive to price changes(e.g., prices go up by 10% and quantity demanded goes down by 2%).Price inelastic demand is typical for goods or services that are necessities, have no goodsubstitutes, and/or are inexpensive relative to one’s income (e.g., insulin, electricity, salt).Elasticity of supply is determined by the availability of the raw materials needed for production,available production capacity, and the time period required to produce more of the good orservice. For example, the supply of seats in a football stadium is fixed; thus the supply isinelastic. (Higher prices offered for tickets will not produce more seats in the short run.)The supply of lawn mowing service is elastic. At a higher price more people will be willing tosupply the service. On the other hand, if there is an increase in the price of strawberries, farmerscannot increase their production immediately, so the supply will be inelastic.Price elastic demand is typical for goods or services that are luxuries or have good substitutes(e.g., expensive cars or a brand of soft drink).Teaching Tips1) Hold up a rubber band and stretch it. It’s “elastic”-- it responds when you pull on it. Hold upa pencil—it doesn’t respond when you pull on it. It’s inelastic.2) Ask students—if the price of Coca Cola doubled, would you buy just as much? (Answers willvary. For some, there is no other drink that’s a substitute, and since the price of Coca Cola issmall relative to their income, they may buy just as much. But most will say no—they will buyless or they will switch entirely to other drinks.) If Coca Cola lost more than half its sales as aresult of a 50% increase in price, we would say the demand for Coca Cola is elastic—it respondsto price changes.3) When buyers react to a 10% price increase by buying more than 10% less of a product, we saythe demand is elastic—the response was greater than the price change. When buyers react to a10% price increase by reducing their purchases by less than 10%, we say demand isinelastic—the response was less than the price change.4) Suppose you are planning a school dance. You’re trying to decide what price to charge. Youfind that 125 people will pay up to $10, but if you raise the price 50%, you will lose 20% of your19Virginia Council on Economic Education

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participants. Is the response greater than the price change, or less than the price change? (It’sless.) So is demand elastic or inelastic? (Inelastic.) When we know that demand is inelastic, weknow we can bring in more money by raising the price—and that we’ll lose money by loweringthe price. (If the goal is raising money, go with the higher price. If the goal is more peopleparticipating, lower the price.)priceDemand for tickets$15100$10125$51505) What kinds of products tend to have inelastic demand? Ask for examples.Price inelastic demand is typical for goods or services that are necessities, have no goodsubstitutes, and/or are inexpensive relative to one’s income (e.g., insulin, electricity, salt).6) What kinds of products tend to have elastic demand? Ask for examplesPrice elastic demand is typical for goods or services that are luxuries or have good substitutes(e.g., expensive cars, a brand of soft drink—not the category soft drinks, but a particular drink.The demand for gasoline is inelastic while the demand for Exxon is elastic…because there aremany substitutes for Exxon gasoline).7) Think about the Super Bowl or the World Series. Many more people want to attend than thereare seats available. Illustrate this with a supply and demand curve (supply curve will be vertical,since the number of seats is fixed). This would be a perfectly inelastic supply curve. Increasesin price bring no increase in the supply of seats.8) The supply of lawn mowing service is elastic. Why? At a higher price more people will bewilling to supply the service. On the other hand, if there is an increase in the price ofstrawberries, farmers cannot increase their production immediately, so the supply will beinelastic.Teaching TipsAP Macroeconomics Elasticity: An IntroductionFocus High School Economics Lesson 7: Price Changes Matter20Virginia Council on Economic Education

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OnlineEconEdLink, Price Elasticity: From Tires to Toothpickshttps://www.econedlink.org/resources/price-elasticity-from-tires-to-toothpicks/VideosCharacteristics that determine elasticity (1:46)http://www.youtube.com/watch?v=EafTlle73ic&list=UU_xHLAJ_zqPHkmC2aY2MdcA&index=30&feature=plcpPaul Solman video clips on elasticity—there are two parts:http://www.youtube.com/watch?v=OWGwggTyHZc (8:37)http://www.youtube.com/watch?v=m90fyVld23A (5:59)The Economic Lowdown Podcast Series - Elasticity of Demand, Episode 16https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-16-elasticity-of-demandReadings“New Blow to Music as Concerts Fizzle”http://online.wsj.com/article/SB10001424052970204204004576049972873921068.html21Virginia Council on Economic Education

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Day 1 - Price ceilings and floorsContent KnowledgeIn a market economy prices are generally determined in the marketplace. Thus it is sometimescalled a price system. For example, suppose a concert sells out of tickets and lots of people areleft standing in line wanting to buy. Was the ticket price above the equilibrium price or below?Suppose a concert has lots of empty seats. Was the price above the equilibrium price or below?In each case, what would likely have happened?Sometimes the government believes that the equilibrium price that results from supply anddemand is too high for consumers to afford or too low for producers to earn a profit. To helpconsumers the government might set a price ceiling—saying businesses can’t charge more thanthis for apartment rent, for example. Price ceilings result in a shortage of the good or service. Tohelp producers, government might set a price floor, saying the price of a product, for examplemilk, can’t sell for less than a certain price. Price floors result in a surplus of the good or service.The supply and demand graph shows why this happens.Government-enforced price ceilings set below the market-clearing price andgovernment-enforced price floors set above the market-clearing price distort price signals andincentives to producers and consumers. Price ceilings can cause persistent shortages, while pricefloors can cause persistent surpluses.2VocabularySurplus- The situation that results when the quantity supplied of a product exceeds the quantitydemanded. Generally happens because the price of the product is above the market equilibriumprice.Shortage - The situation that results when the quantity demanded for a product exceeds thequantity supplied. Generally happens because the price of the product is below the marketequilibrium price.Price Ceilings -A price ceiling sets the highest price that can be charged for a good or service.The price is generally set below the equilibrium price and results in a shortage.Price Floors -A price floor sets the lowest price at which one can buy a good or service. Pricefloors are generally set above the equilibrium price and result in a surplus.Virginia Board of Education FrameworkIf the price is above the equilibrium price, buyers will purchase less than is available, andsuppliers will offer more, creating a surplus. When a surplus exists, prices will decrease untilthey reach the equilibrium price. If the price is below the equilibrium price, buyers will want tobuy more than is available, and suppliers will want to supply less. This will result in a shortage.22Virginia Council on Economic Education

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Buyers will bid the price up until it reaches equilibrium price. Shortages of a product usuallyresult in price increases in a market economy; surpluses usually result in price decreases.Teaching Tips1) Ask students if they’ve ever wanted to buy tickets to a concert or other event and couldn’tbecause they were sold out? Would they have been willing to pay more than the going price toget in? What would have solved this problem? Should the ticket prices have been raised orlowered? (Raised. At some higher price there would have been exactly enough seats for everyonewho was willing and able to pay to get in.)2) Draw a supply and demand curve. Draw the supply curve as a straight vertical line andexplain this is because we assume the theater has a fixed number of seats no matter what theprice. Mark the equilibrium point. Assume this is the equilibrium price for the tickets youwanted. Draw the demand curve as a normal downward sloping curve. Choose a price a bitlower than the equilibrium price. Assume this is the advertised ticket price. Draw a broken line tothe demand curve. What is the quantity demanded at this point? Is it greater or less than thequantity supplied. (It’s greater.)Point out that when a price is established below the equilibrium price, the result will be ashortage. Ask what will happen. Generally, when there is a shortage, prices will rise. People whodidn’t get tickets will offer to pay current ticket holders more.3) Ask what happens in the marketplace when something isn’t selling because the price is toohigh. (Generally, the item is put on sale.) When a price is set above the equilibrium price, notenough people will buy and there will be a surplus. Picture a concert with lots of empty seats.Show this on a supply and demand graph.4) Give students data to diagram supply and demand graphs where the price is above or belowthe equilibrium price. Ask students whether there is going to be a surplus or a shortage.Will that result in a price increase or a decrease? (The price is going to move toward theequilibrium price.)5) Summarize what we know:● People buy more at lower prices.● Sellers want to bring more to market at higher prices.● Prices move toward equilibrium● A price above equilibrium will result in a surplus—and the price will tend to come downas sellers want to sell.● A price below equilibrium will result in a shortage—and the price will tend to move up asbuyers who lost out bid the price up by offering to pay more.6) Ask students if they ever think prices are too high. Rarely the government believes that theequilibrium price for something is too high for consumers to afford and so might set a priceceiling—saying businesses can’t charge more than a certain price. Discuss. What would happen23Virginia Council on Economic Education

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if government set a price limit on gasoline and said it couldn’t be sold for more than that.Discuss. Do they think that would be a price ceiling or price floor? (Ceiling.) Have them draw asupply and demand curve for gasoline with the price ceiling below the market clearing price.What would happen? (Shortage. Long lines at the gas pumps.) In the 1970’s the governmenttried to keep prices low instead of letting gasoline prices rise. Half the people could buy gas oneven numbered days, half on odd numbered days. These attempts to hold prices down during theshortage resulted in very long lines. This McDonalds commercial includes these long lines:http://www.youtube.com/watch?v=tjXhwevOVAE&feature=related7) A more common, and current example of price ceilings is rent controls—in New York city,and a number of other large cities, governments set limits on how much landlords can charge inrent. The idea is that longtime residents of these cities would be forced out of their apartmentsbecause of rising rental rates caused by increased demand for apartments in these cities. Discusswhether this is a good or bad thing. What do they think the results will be? Have students drawa supply and demand curve and mark the current equilibrium price and quantity. Then make therent lower. What will happen to the quantity demanded? (It will go up, because at the lowerprice even more people will want apartments.) What will happen to the equilibrium quantity?(It will go down as some landlords will convert their apartments to condos and sell them ratherthan rent at lower than market prices.) Who benefits? (People who get the apartments at lowerthan market rates.) Who is hurt? (Landlords who get lower than the market rate in rents. Peoplewho wanted apartments but can’t get them now because of the shortage. People who live inapartments where the landlord no longer keeps them up because of lower rent.)Summarize that price ceilings put a ceiling or limit on how much can be charged for a good orservice. Price ceilings result in a shortage of the good or service.8) The government sometimes steps in when producers say the market price is too low for themto cover their costs. For example, government says that the price dairy owners get for milkcannot be below a certain price. This is an example of a price floor. Illustrate this with a supplyand demand graph. Show the price floor above the equilibrium price. Note the quantitydemanded and the quantity supplied at the equilibrium price. When the price floor isimplemented at the higher price will the quantity supplied be higher or lower? (Higher, becauseat the higher price, milk producers will produce more.) Will the quantity demanded be higher orlower? (Lower, because at the higher price, they will demand less.) The difference between thequantity demanded and the quantity supplied is the milk that is unpurchased in the market. Thatis called a “surplus”. What happens to that milk? The government pays for it.Summarize that price floors put a limit on how low a price may be paid for a good or service.A price floors result in a surplus.9) Governments have implemented price ceilings and floors from time to time throughouthistory. Generally economists have found them inefficient except in states of emergency.Students can read a brief summary here:http://www.econlib.org/library/Enc/PriceControls.html24Virginia Council on Economic Education

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Lessons and ResourcesCapstone Lesson 14: Secondary Effects: Price Ceilings and Price Floors”Focus: High School Economics Lesson 6: Price Controls: Too High or Too LowOnlineEconEdLink, Who Knows What Inefficiencies Lurk in the Hearts of Rent Controlled HousingMarkets? The Shadow Market Knows!Illustrates the effects of rent controls in New York Cityhttps://www.econedlink.org/resources/who-knows-what-inefficiencies-lurk-in-the-hearts-of-rent-controlled-housing-markets-the-shadow-market-knows/Videosmjmfoodie - Price Floors and Price Ceilings, Episode 15 (6:01)http://www.youtube.com/watch?v=XgBPAucs-W4&list=UU_xHLAJ_zqPHkmC2aY2MdcA&index=15&feature=plcpDay 2 - Review supply, demand, equilibrium price, determinants ofsupply & demand, elasticity, price ceilings and price floorsEVALUATION DAY25Virginia Council on Economic Education