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Prices and Value

property,Law of Demand

Prices and Value Activity: Prices – An Intuitive Approach

Materials needed: A candy bar or other desirable and affordable object, like a certificate for extra credit points.

Call one student up to the board or projector to serve as a recorder. She/he should mark Quantity and Price at the top of the board. Tell him/her to put the starting price on the board. Hold up an object that students both might like and whose price they will probably be able relatively accurately to judge, such as a candy bar.

Tell students that we are going to hold an auction for the candy bar. Tell them that anyone bidding will be held to his or her bid and that the winner must pay in cash. (This should deter unrealistic bids.) Also tell them that the instructor will decide which round to end bidding (this should deter students from saving high bids until the last round).

The bidding will be progressive. That is, you will announce a starting price and all willing students will bid on that price by lifting their hands. Remind them that every bid is obligatory.

Start the bidding. Ask which students are willing to pay, for example, $0.25. The recorder should count the number of students bidding and mark them on the board. Start raising prices by $0.10 to $0.50, at your discretion. Each round, have the recorder count and mark down the price and quantity. Repeat.

Once the last round is reached (determined by the instructor), award the object to the highest bidder (both how and if permitted).

Now have students look at the relationship between price and quantity on the board and ask the following:

What happened to the quantity demanded as the price rose? Why did this occur?

  • Answer: Explain to students that this phenomenon is the “law of demand”. That is, as the price of a good or service rises, the quantity demanded decreases. Explain to students that, due to the economic problem, this is an immutable and eternal law. No matter how much we prefer to avoid it, it will always exist.

Why are those who pay the higher price willing to do so?

  • Answer: They are willing and able to do pay a higher price. Ultimately, those people either desire the candy bar more and/or have fewer strains on their financial resources. The latter means that they have fewer desired alternative uses for their expenditures.

Now ask, “A certain number of students were willing to buy the candy bar at the lowest price. Would they all definitely get that many candy bars? Would I—or the company– have supplied that many candy bars at that price? Why or why not?”

  • Answer: No. Low prices mean that, taking into consideration the cost of candy bar inputs, including cocoa, machinery, wrapping, packaging, and branding—over all of which the chocolate producer has little influence–and the cost of labor—which is, on average 70% of company costs—and the fact that the quantitative return of each input is smaller and smaller—there is a diminishing reason to produce more at a smaller price. (Note: Young students have a very difficult time grasping costs to companies and the limitations those costs impose. Teachers may need to reinforce this point.)

Tell students that this phenomenon (producers are willing and able to supply a greater quantity at a higher price) is called “the law of supply”, and it is another immutable, inarguable law of economics. Remind them that this law is dependent on the costs to producers.

To end, tell students that, ultimately, the price of a product depend both on how much consumers want it at a certain quantity (marginal utility) and the cost of production of the last unit (the marginal cost of production). The intersection of these two is the intersection of supply (marginal costs) and demand (marginal utility)

Tell students to consider iPods and how they are sold and bought on the market. What is Apple’s objective for selling them? What do consumers want from Apple? How much do they value iPods? How can you tell?

Ask students to summarize how Apple’s costs of production and distribution for the iPod (supply) and the amount of iPods that the world desires (demand) coordinate.

What would happen if the price of iPods were very low relative to the demand for iPods?

  • Answer: There would be too many iPods (a surplus), because the quantity demanded (the “utility” of iPods) would exceed the quantity the company was able and willing to supply at that price (the “marginal cost” of iPods).

What would happen if the price of iPods were very high relative to the demand for iPods?

  • Answer: There would be too few iPods (a shortage), because the quantity demanded (the “utility” of iPods) would be less than the quantity the company was able and willing to supply at that price (the “marginal cost” of iPods).

Final question: Summarize for me – What determines the price (the monetary value) of a product or service? How does this happen?

Prices and Value Activity: Allocating Resources Through Prices

Hold up a simple, standard, number two pencil and ask students the following:

In general, from where do the components of this pencil come?

  • Answer: From around the world.

Who in this class could make one of these from beginning to end?

  • Answer: No single individual in the world could. It requires too much specialization of labor in too many places around the globe. No one has that much time and skill.

How many people are involved in the production of this pencil around the world?

  • Answer: Thousands, if not millions.

Who or what tells the lumberman or the aluminum miner for what purpose he or she is cutting wood or mining, respectively?

  • Answer: Prices indicate that they should conduct these actions, although there is no central direction.

What enables producers and workers to know how much to produce and where to send the production? What is the source of this power?

  • Answer: Prices send these signals. With no need for a central planner, who could never accomplish the task, prices send signals of where producers should direct resources and where consumers should purchase resources.

Pass out Handout D: Excerpts from I, Pencil. Review the article’s background and the directions with students. Students are to read the article thoroughly and summarize each section in notes. When completed, pass out Handout E: I, Pencil Essays. Depending on time, students should complete the essays in class or as homework. Close with the following statement: Many people discuss the “free market” and its superiority to other economic systems. What are the arguments for and against these statements?

An unregulated market allows people to connect buyers and sellers with no interference from government or other artificial barriers.

Prices allocate resources on a neutral, but subjective, basis. An unfettered market distributes scarce resources to those who most value them.

Prices and Value Activity: Subjective Value Trade Game

Materials needed: You will need a brown paper bag with at least one item per person (the more variety of items, the better), a stopwatch, and Handout A: Trading Game Score Sheet.

Project, display, or distribute Handout A: Trading Game Score Sheet. Have the students sit in groups of 4-6. Give each student a closed bag, and instruct them not to look inside.

Before opening the bags, have the students rate their current level of happiness on a scale of 1 (unhappy) to 5 (very happy) for Round 1. Record the number of students who voted for each level of happiness and calculate the total happiness by adding the products of the level of happiness and the number of students (example below).

For Round 2, have the students open their bags and rate their happiness again. For Round 3, allow the students to trade items (voluntary trades only!) within their group of 4-6. For Round 4, allow the students to trade with anyone on their half of the room. Finally, all free trade for Round 5.

Ask the students how their levels of happiness changed throughout the game and why; it’s good to get answers from students who increased as well as those who remained stagnant or decreased. This is a great time to introduce the concepts of subjective value and gains from voluntary trade. Ask students to consider how their behavior would have changed if there had been restrictions on the number of trades, taxes on trades, or if the bags hadn’t been their own private property.

This is an easy game to put your own touches on. Some examples include: tell 2 students they represent North Korea and Cuba and are therefore not allowed to trade; levy taxes on students; etc.

Prices and Value Activity: Value and Prices

Pose the questions: What makes something “valuable”? How do we determine the “value” of a good or service?

  • Answers will differ. Accept any reasonable student answers. Ultimately, most students will find a confluence of supply (how much it costs for someone to produce the product) and demand (how much the product is needed or desired) determines value as reflected in price.

Explain that thinkers in the past often differed as to why some things had greater value than others and what the sources of that value were. They came up with several ideas, which we will explore in the readings.

Before reading, provide the students with the following definitions: Utility: The satisfaction a person derives from a using a product or conducting an action. Marginal: “one more”. Marginal analysis is examination of the additional benefits of making incremental changes compared to the additional costs of doing so. Subjective: Based on personal feelings, tastes, or opinions. Equilibrium: A state in which opposing forces are balanced.

Pass out Handout B: Theories of Value and Handout C: What Creates Value? Ask students to read the Articles in Handout B and, when finished, complete the guided reading questions in Handout C. As a class, discuss students’ answers.

In closing, emphasize that value (as expressed in prices) is determined by the costs of creating the product, including all inputs (including labor), and by subjective utility, or how much satisfaction or pleasure we get from the good. When the producers’ price and consumers’ price intersect, we get an “equilibrium price” in which just enough supply is created to meet demand, with no shortage or surplus of the good.

Student Handouts

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