Supply and Demand

Teaching Money Skills Part 2 of 8

Topic: Supply and Demand

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I. Welcome

II. Topic of the week - Supply and Demand

III. Teaching Supply and Demand

IV. Learning Activities

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I. Welcome

Once again I would like to thank you for joining us. Timothy
Liptrap here again for the "101 Financial Lessons" newsletters.

As you know, this is a free service to teachers and parents who
wish to teach financial education to their children.

If you have any comments or thoughts on how to improve this
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Email: tliptrap@101financiallessons.com

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II. Topic of the Week - Supply and Demand

The concept of Supply and Demand is considered to be the foundation
of economic theory and thought. These principles are taught in all
introductory economic courses.

Everyday, people around the world are affected by the Law of Supply
and the Law of Demand. If you purchased gasoline, a gallon of milk,
a hamburger or any product or service today; the price you paid was
determined by market demand, which is derived from the Law of
Supply and Law of Demand.

Law of Supply

The Law of Supply states that when there is an increase in a product's
price the supply of that product will increase.

As an example, a consumer visits their local grocery store in search
of a specific type of cereal. When they get to the store, the price of the
cereal that they prefer is $3.50, $1.00 more than they paid last week.
The consumer then makes a decision to purchase another brand or
type of cereal that is more cost effective. By raising the price on the
box of cereal, in theory, the number of boxes sold will be less and the
supply on the store shelves will increase.

Law of Demand

The Law of Demand states that when there is an increase in a product's
price, the demand for that product will go down.

As an example, in Massachusetts a section of the Massachusetts Turnpike
raised tolls from $.50 to $1.00 without offering any new services or
products to the motorists.

Since the price for entry to use the turnpike was raised, the usage (demand)
decreased, because motorists were not willing to pay the new toll rates and
found alternate routes to home and work.

As a result of the lower usage, the Massachusetts Turnpike Authority has
authorized a 50% discount to those who enrolled in Fast Lane (an electronic
toll payment system used by more than 560,000 Mass Pike commuters) to
encourage the motorists to return.

What factors create more demand for product?

· Advertising

· Change of a person's tastes

· Coupon or discount

· Price of a product

Understanding the factors that initiate a price change will help you plan
and make better purchases, thus saving you money.

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III. Teaching Supply and Demand

Economic concepts are not easy to teach. As a teacher or parent you
need to have an understanding of economic theory and then be able
to teach those concepts to your students or children.

In teaching economic theory, we would suggest using common
everyday products or services, which your children can relate to. We
recommend using a hotel in a resort area or city to teach this subject.

Using a hotel to teach Supply and Demand.

Step 1.

Open with a discussion of how a hotel earns revenue by renting
rooms to business people and vacation travelers.

Step 2.

Discuss how the demand for hotel rooms will change from day to day,
based on conventions, holidays, special events, school vacations and
weekends.

Note: The number of hotel room nights available does not change easily,
hence the supply remains constant while demand changes.

Step 3.

Review the concept of Supply and Demand by using the "on-season"
and "off-season" rates advertised by hotels in vacation area.
"On-season" rates are during times of higher demand and "off-season"
rates are for period's low demand.

Talking Points

· The supply of hotel rooms does not change from day to day.

· Demand for hotel rooms change based on seasonal demands
or special functions.

· Change in demand for rooms will causes room rates to rise
(i.e. on or off-season rates).

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IV. Learning Activity

Supply and Demand

Planning a Vacation

Goals:

To help students understand the concept of Supply and Demand.

Tools:

q Paper

q Pencil

q Internet

Skills used:

q Research

q Map Reading

q Internet Usage

q Problem solving

q Comparison shopping

q Discussion

Directions:

Step 1.

Fold a piece of notebook paper into thirds (the long way)
creating three columns. On the top left column write today's
date, on the top of middle column write the date of July 15
and on the top of right column write August 30.

Step 2.

Using the Internet as a research tool, visit the Southwest
Airlines web site (http://www.southwest.com).

Step 3.

Click the "reservations" button on the top left. Choose that
city /airport closest to your home as a departure city. Next
choose a city (to arrive) at least 1,000 miles away from your
home. Be sure to choose "Round Trip" for all trips.

Choose the dates from Step 1 above and price out three airline
packages for two people, returning one week (7 days) later.

Pick flights that leave before noon. Then choose the lowest airfare
price that matches the criteria above.

Step 4.

Answer the following questions:

1. Which trip cost less?

2. Is there a difference between the cost of flying in July
vs. August, and why?

3. Does school vacation increase travel prices, if so, why?

4. When planning for holiday travel, how could the Internet
help you to save money?

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Enjoy the rest of your week.

Timothy Liptrap

Vice President, Education and Development
101 Financial Lessons

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