Understanding the Law of Supply and Demand

Objectives:

1. Interpret the law of supply and demand.

2. List factors affecting supply and demand.

3. Recognize impact of farm support and demand.

Teaching Time:

5 hours

References:

Deere and Company. Farm and Ranch Business Management. Moline, IL. ISBN: 0-86691-135-9. 1992.

Deere and Company. Farm and Ranch Business Management Study Guide. Moline, IL. 1992.

Materials and Equipment:

Teaching Procedure

Introduction and Mental Set

Bring in a supply of penny candy and offer to sell it to the students. Set the price at twenty-five cents per piece. What happened to the market? Adjust the price to one cent per piece. What happened to the market in this example? Today we are going to learn about supply and demand.

Discussion

1. What determines price?

Talk about price being a result of the interaction of the forces of supply and demand (

2. If demand increases, prices rise. If supply increases, prices fall.

3. Prices are never steady regardless if they are agricultural or non-agricultural products.

4. Explain the market price cycle

A. Higher prices decreases the demand and increases the supply

B. Lower prices increases the quantity and decreases the supply

5. Now the market will move up and down adjusting the quantity of supply and the quantity of demand until they reach an equilibrium price. At this point the market is cleared and a new cycle begins

6. The Law of Demand

The demand for a product is the amount that buyers are willing to purchase. The Law of Demand states that when the price of a product is increase with no change in factors other than price, less product will be taken

A. Low price = more quantity demanded

B. High price = less quantity demanded

7. How does the Law of Demand work?

(Use example of a vendor wanting to sell hotdogs). If a seller wishes to increase sales volume, then they must lower the price of the product. In this case, hotdogs...

8. Examples of how demand works

A. Greater quantities sell at lower prices

B. Higher prices come from selling smaller quantities

C. At lower prices new buyers come into the market and those already buying, buy more (Example - Compare rib eye steaks at \$6.25 per pound with rib eye steaks at \$2.25 per pound. At the lower price people that had not been eating rib eyes would enter the market and more steaks would be sold.)

D. At higher prices some buyers stop buying all together, and the others buy less. (Reverse the last example)

9. What causes shifts in demand?

A. Changes in such factors as:

• Consumer income
• Population
• Tastes
• Competing products and
• Expectations

can cause changes in the consumption of a given product without any change in the price of the product.

B. Such factors are called shifters, because they tend to change or shift the relationship between the price and the quantity demanded. (Example - Drop in beef prices recently occurred when Oprah Winfrey reported on Mad Cow Disease and stated she would eat no more beef. This one program caused a shift downward in price.)

10. Summary of shift factors

A. Population increase or decrease

B. Taste

C. Consumer income

D. Price of competing products

E. Expectation

F. Example - Look at the fact that there is less demand for lamb today than 20 years ago. The main reason is thought to be that most of today’s consumers simply have not developed a taste for lamb as much as their tastes for beef, pork, and poultry.

1. Activity

Divide class into four groups and present each group a different scenario involving supply and demand situations they might face in everyday life.

Summary

The Law of Demand partly explains the behavior of a wide range of individual buyers. Those buyers have many differences in taste and income that can shift market demand. The Law of Demand attempts to explain the market including all of these differences. Shifts in the demand sometimes overshadow the effects of price changes. This has caused some who do not understand the concept of demand to doubt that the law of demand is valid. So, think of the Law of Demand, and the shift factors. Together, demand shifts and price changes account for any changes in demand for a given product. (fig 11 page 7.7 from the Farm and Ranch Business Management).

Evaluation

Written test

Activity evaluation