Download 3.02 Supply and Demand

CONTENT/TEACHING OUTLINE
COMPETENCY:
3.00
Understand economic principles and concepts fundamental
to marketing.
OBJECTIVE:
3.02
Interpret the theory of supply and demand.
A. Explain supply and demand.
1. Supply: The amount of goods producers are willing and able to produce and sell
at a given price during a certain period of time. Producers prefer to supply when
the price is high; this is known as a sellers’ market. For example, when a popular
music artist releases a new CD, producers will produce more because
consumers are willing to pay full price.
2. Demand: A consumer’s willingness and ability to buy products at a given price
during a certain period of time. Consumers prefer to buy when the price is low;
this is known as a buyers’ market. For example, Zach makes minimum wage
and prefers to purchase CDs when they go on sale.
3. The law of supply: With all other factors being equal, as the price of a product
increases, the quantity supplied will increase, and as the price of a product
decreases, the quantity supplied will decrease.
4. The law of demand: With all other factors being equal, as the price of a product
increases, consumer demand for the product decreases, and as the price of a
product decreases, consumer demand for the product increases.
B. Summarize surplus, shortage, and equilibrium.
1. Surplus: When supply exceeds demand.
a. Can occur when price is too high.
b. Can occur when customers choose a competitor’s product.
2. Shortage: When demand exceeds supply, also referred to as scarcity.
a. Producers can increase prices and customers may continue to purchase the
product.
b. A shortage of a product may result in a customer purchasing a substitute
product.
3. Equilibrium: Occurs when supply and demand are equal.
a. Both the producer and customer are satisfied and agree upon a price.
b. People’s wants and needs are met and at the same time the supplier’s needs
are met.
C. Explain elasticity.
1. Elasticity: The degree to which demand for a product is affected by its price.
a. Elastic demand: Refers to how changes in the price of a product result in a
change on the demand for that product. For example, when the price of a
cheeseburger is reduced, demand may increase. If the price of a
cheeseburger increases, demand may decrease.
b. Inelastic demand: Refers to how changes in the price of a product have very
little affect on the demand for that product. For example, some people might
be willing to pay any price for gas.
2. Factors that affect the elasticity of demand.
Marketing
Summer 2006
53
CONTENT/TEACHING OUTLINE
COMPETENCY:
3.00
Understand economic principles and concepts fundamental
to marketing.
OBJECTIVE:
3.02
Interpret the theory of supply and demand.
a. Availability of substitutes. If a substitute is easily obtainable, demand
becomes more elastic. For example, I prefer Pepsi but if Coke is on sale, I
will buy Coke.
b. Brand loyalty. Many customers will only purchase a certain brand. In
general, brand loyal customers will accept no substitutes. In this situation,
demand becomes inelastic. For example, if someone is brand loyal and only
purchases Gatorade, he/she will purchase Gatorade even when the price is
significantly higher than the price of Powerade.
c. Price relative to income. When an increase in the price of a good or service
does not have a major impact on a customer’s budget, the demand is usually
inelastic. For example, if the price of Orbit gum increases from $0.99 to
$1.29, this has little impact on the customer’s budget. In this case the
demand is inelastic. When an increase in the price of a good or service has a
major impact on a customer’s budget, the customer most likely will no longer
buy a product. In this case, the demand is elastic. For example, a Honda
Accord has a price increase of $2,000. This would have a major impact on a
household income of less than $20,000 per year. In this case, the demand is
elastic.
d. Luxury vs. necessity (want vs. need). When a product is a necessity, demand
is usually inelastic. For example, purchasing medicine for a sick child would
be a necessity. When a product is a luxury, demand is most likely to be
elastic. For example, going out to eat versus fixing dinner at home would be
a luxury.
e. Urgency of purchase. If a purchase must be made immediately, demand
tends to be inelastic. For example, if a car breaks down the owner may need
to get it fixed ASAP.
Marketing
Summer 2006
54
CONTENT/TEACHING OUTLINE
COMPETENCY:
3.00
Understand economic principles and concepts fundamental
to marketing.
OBJECTIVE:
3.02
Interpret the theory of supply and demand.
Teacher Resources
Activity 1
As a class, list a variety of plays, movies, etc. on the board. Assign pairs of students
one movie, play or other to research on the Internet. They are to uncover the current
demand and prices for tickets and merchandise for their topic. Teams can then share
their information with the class.
Activity 2
Have students complete the Supply and Demand crossword puzzle included in the
Activities folder for this competency.
Activity 3
Have students complete the “Elastic or Inelastic” worksheet included in the Activities
folder for this competency.
Activity 4
Have students complete the “Popcorn Economics” lesson included in the Activities
folder for this competency.
Other Resources
3.02 PowerPoint Presentation
Marketing
Summer 2006
55