- - AGRICULTURAL CORE CURRICULUM - - (CLF1000) Advanced Core Cluster: AGRICULTURAL BUSINESS MANAGEMENT (CLF1200) Unit Title: Economic Principles ____________________________________________________________________________ (CLF1202) Topic: SUPPLY, DEMAND, AND PRICE Time Years DETERMINATION 5 Hours 3 / 4 ____________________________________________________________________________ Topic Objectives: Upon completion of this lesson, the student will be able to: Learning Outcome #: (E-2) - Describe how supply and demand affect prices. (E-3) - List factors that shift the supply and demand curves. Supplemental Materials: SUPPLEMENTAL HANDOUT 1 BLANK GRAPH SUPPLEMENTAL WORKSHEET 1 GRAPHING A SUPPLY CURVE SUPPLEMENTAL WORKSHEET 1 INSTRUCTOR KEY SUPPLEMENTAL HANDOUT 2 SHIFTS IN SUPPLY SUPPLEMENTAL WORKSHEET 2 GRAPHING A DEMAND CURVE SUPPLEMENTAL WORKSHEET 2 INSTRUCTOR KEY SUPPLEMENTAL HANDOUT 3 SHIFTS IN DEMAND SUPPLEMENTAL WORKSHEET 3 SUPPLY CURVES, DEMAND CURVE, AND EQUILIBRIUM PRICE SUPPLEMENTAL WORKSHEET 3 INSTRUCTOR KEYS SUPPLEMENTAL WORKSHEET 4 SUPPLY AND DEMAND REVIEW SUPPLEMENTAL WORKSHEET 4 INSTRUCTOR KEY References: Leftwich, R. H. (1976). THE PRICE SYSTEM AND RESOURCE ALLOCATION (6th ed.). Hinsdale, IL: Dryden Press. Evaluation: Completion of Supply and Demand Review TOPIC PRESENTATION: SUPPLY, DEMAND, AND PRICE DETERMINATION A. Supply 1. Supply is the various quantities of a good that sellers will place on the market at different prices at a particular time, everything else remaining unchanged. a. Supply refers to the total quantities that will by supplied by all of the sellers in a market. It is the sum of the quantities all of the individual sellers in a market will supply. b. A supply schedule lists the various quantities of the good that sellers will provide opposite the various alternative prices of the good. c. A supply curve is a supply schedule plotted on a graph. The vertical axis of the graph measures price per unit, and the horizontal axis measures quantity of the good supplied at a given time. d. The term "supply" refers to the entire supply schedule or curve. e. Usually the supply curve will be upward sloping to the right, since a higher price will induce sellers to place more of the good on the market. f. At a given time, a change in price will be accompanied by a corresponding change in the quantity supplied to a market by sellers. This is referred to as a change in the quantity supplied, and is graphically demonstrated by a movement along a given supply curve. _________________________________________________________ ACTIVITY: 1. Complete SUPPLEMENTAL WORKSHEET 1, Graphing a Supply Curve. Using SUPPLEMENTAL HANDOUT 1, Blank Graph, plot the points and draw the supply curves. Discuss differences in quantity supplied at different prices on the curve. _________________________________________________________ 2. A specific supply curve is determined by a number of factors, including: a. The prices of the inputs used to produce the product b. The production techniques available c. Weather conditions d. The prices of other products e. Government programs, such as acreage allotments f. Sellers' expectations of prices 3. A change in any of these underlying factors can cause a change in supply. a. A change in supply is defined as a shift in the entire supply curve. b. An increase in supply means that at each price, the quantity supplied will be greater. An increase in supply is graphically illustrated by a shift of the supply curve downward and to the right. c. A decrease in supply means that at each price, the quantity supplied will be less. A decrease in supply is graphically illustrated by a shift of the supply curve upward and to the left. _________________________________________________________ ACTIVITY: 1. Refer to SUPPLEMENTAL HANDOUT 2, Shifts in Supply, to illustrate an increase in supply and a decrease in supply. Compare the quantities supplied at different prices on SS, S1S1, and S2S2. Discuss factors that may cause the supply curve to shift. Use local examples to stimulate the discussion. _________________________________________________________ B. Demand 1. Demand is the various quantities of a good that buyers will purchase at different prices at a given time, everything else remaining unchanged. a. Demand refers to the quantities that will be purchased by all of the buyers in a market. It is the sum of the quantities all of the individual buyers in a market will purchase. b. A demand schedule lists the various quantities of the good that buyers will purchase at different prices at a given time. c. A demand curve is a demand schedule plotted on a graph. The vertical axis of the graph measures price per unit, and the horizontal axis measures quantity of the good demanded at a given time. d. The term "demand" refers to the entire demand schedule or curve. e. Usually the demand curve will be downward sloping to the right, since a lower price will induce buyers to purchase more of the good. 1) Demand is determined by the utility, or satisfaction, that buyers attain from the consumption of a good. 2) As a buyer consumes additional units of a specific good, the amount of utility derived from each additional unit of that good decreases. This is the law of diminishing marginal utility. 3) Because of diminishing marginal utility, the price of a good must fall for a buyer to purchase more of it. This is why demand curves slope downward. f. At a given time, a change in price will be accompanied by a corresponding change in the quantity demanded by buyers. This is referred to as a change in quantity demanded, and is graphically demonstrated by a movement along a given demand curve. _________________________________________________________ ACTIVITY: 1. Complete SUPPLEMENTAL WORKSHEET 2, Graphing a Demand Curve. Using Supplemental Handout 1, Blank Graph, plot the points and draw the demand curve. Discuss differences in quantity demanded at different prices on the curves. _________________________________________________________ 2. A specific demand curve is determined by a number of factors, including: a. Consumers' tastes and preferences b. The number of consumers in a market c. Consumers' income d. The prices of related goods e. The range of goods available f. Consumers' expectations of future prices of the product 3. A change in any of the above underlying factors can cause a change in demand. a. A change in demand is defined as a shift in the entire demand curve. b. An increase in demand means that at each price, the quantity demanded will be greater. An increase in demand is graphically illustrated by a shift of the demand curve upward and to the right. c. A decrease in demand means that at each price, the quantity demanded will be less. A decrease in demand is graphically illustrated by a shift of the demand curve downward and to the left. _________________________________________________________ ACTIVITY: 1. Refer to SUPPLEMENTAL HANDOUT 3, Shifts in Demand, to illustrate an increase in demand and a decrease in demand. Compare the quantities demanded at different prices on DD, D1D1, and D2D2. Discuss factors that may cause the demand curve to shift. _________________________________________________________ C. Price Determination 1. Price is jointly determined by the interaction of supply and demand. 2. At the point where the demand curve intersects the supply curve, the quantity demanded by buyers equals the quantity supplied by sellers. This occurs at the equilibrium price. a. At the equilibrium price, the quantity demanded by buyers equals the quantity supplied by sellers. The market will "clear." 3. At any price higher than the equilibrium price, the quantity supplied by sellers will be greater than the quantity demanded by buyers. A surplus will develop. a. In order to sell this surplus, sellers must lower their price to the equilibrium price. 4. At any price lower than the equilibrium price, the quantity demanded by buyers will be greater than the quantity supplied by sellers. A shortage will develop. a. Faced with shortages, buyers will bid against each other for the available supply until the price rises to the equilibrium price. 5. Through these dynamic bidding processes, the market tends toward equilibrium. _________________________________________________________ ACTIVITY: 1. Complete SUPPLEMENTAL WORKSHEET 3, Supply Curves, Demand Curves, and Equilibrium Price. Identify the equilibrium price for each of the commodities. Discuss what would happen at a price of $25 for Christmas trees (a surplus) and a price of of $0.40 for peanuts (a shortage). _________________________________________________________ D. Change in Supply or Demand: Effects on Equilibrium Price 1. A change in supply, while demand remains constant, will change the equilibrium price. a. An increase in supply, while demand remains constant, will result in a decrease in the equilibrium price. b. A decrease in supply, while demand remains constant, will result in an increase in the equilibrium price. _________________________________________________________ ACTIVITY: 1. Complete the demand curve DD on SUPPLEMENTAL HANDOUT 2, Shifts in Supply. Identify the equilibrium price at supply curve SS, when supply increases to S1S1, and when supply decreases to S2S2. _________________________________________________________ 2. A change in demand, while supply remains constant, will change the equilibrium price. a. An increase in demand, while supply remains constant, will result in an increase in the equilibrium price. b. A decrease in demand, while supply remains constant, will result in a decrease in the equilibrium price. _________________________________________________________ ACTIVITY: 1. Complete the supply curve SS on SUPPLEMENTAL HANDOUT 3, Shifts in Demand. Identify the equilibrium price at demand DD, when demand increases to D1D1, and when demand decreases to D2D2. _________________________________________________________ E. Summary 1. The equilibrium market price is jointly determined by supply and demand, that is, by both the preferences of buyers and the production decisions of sellers. 2. Changes in either supply or demand may change the equilibrium price of a product; that is, changes in any of the factors underlying the supply or demand curves will result in a change in the equilibrium price for the product. _________________________________________________________ ACTIVITY: 1. Complete SUPPLEMENTAL WORKSHEET 4, Supply and Demand Review. _________________________________________________________ SUPPLEMENTAL HANDOUT 1 - BLANK GRAPH | | | | | | | |__________|__________|__________|__________|__________|__ | | | | | | | | | | | | | | | | | | | | | | | | |__________|__________|__________|__________|__________|__ | | | | | | P | | | | | | | | | | | | R | | | | | | |__________|__________|__________|__________|__________|__ I | | | | | | | | | | | | C | | | | | | | | | | | | E |__________|__________|__________|__________|__________|__ | | | | | | | | | | | | | | | | | | | | | | | | |__________|__________|__________|__________|__________|__ | | | | | | | | | | | | | | | | | | | | | | | | |__________|__________|__________|__________|__________|___ Q U A N T I T Y SUPPLEMENTAL WORKSHEET 1 - GRAPHING A SUPPLY CURVE Graph supply curves for each of the following supply schedules. Graph each on a separate blank graph. Graph 1 Supply of Christmas Trees Price/Tree Quantity Supplied __________________________________ $10 10 10 35 20 50 25 75 30 90 Graph 2 Supply of Peanuts Price/Pound Quantity Supplied __________________________________ $ .40 1500 .70 1900 1.00 2300 1.30 2700 SUPPLEMENTAL WORKSHEET 1 - INSTRUCTOR KEY GRAPH 1 CHRISTMAS TREES | | | | | | | | | | | | 30|__________|__________|__________|__________|______X___|__ | | | | | | | | | | | | | | | | | | | | | | | | 25|__________|__________|__________|_______X__|__________|__ | | | | | | P | | | | | | | | | | | | R | | | | | | 20|__________|__________|_____X____|__________|__________|__ I | | | | | | | | | | | | C | | | | | | | | | | | | E 15|__________|______X___|__________|__________|__________|__ | | | | | | | | | | | | | | | | | | | | | | | | 10|____X_____|__________|__________|__________|__________|__ | | | | | | | | | | | | | | | | | | | | | | | | |__________|__________|__________|__________|__________|___ 20 40 60 80 100 Q U A N T I T Y Connect X's to complete supply curve. SUPPLEMENTAL WORKSHEET 1 - INSTRUCTOR KEY Graph 2 Peanuts | | | | | | |__________|__________|__________|__________|__________|__ | | | | | | | | | | | | | | | | | | | | | | | | 1.30|__________|__________|__________|___X______|__________|__ | | | | | | P | | | | | | | | | | | | R | | | | | | 1.00|__________|__________|______X___|__________|__________|__ I | | | | | | | | | | | | C | | | | | | | | | | | | E .70|__________|_______X__|__________|__________|__________|__ | | | | | | | | | | | | | | | | | | | | | | | | .40|__________X__________|__________|__________|__________|__ | | | | | | | | | | | | | | | | | | | | | | | | |__________|__________|__________|__________|__________|___ 1500 2000 2500 3000 Q U A N T I T Y Connect the X's to complete the supply curve. SUPPLEMENTAL HANDOUT 2 - SHIFTS IN SUPPLY | | | | | | | 5 |_____D____|__________|__________|__________|__________|__ | | S2 S S1 | | | | | | | | | | | | | | | | | | | 4 |__________|__________|__________|__________|__________|__ | | | | | | P | | | | | | | | | | | | R | | | | | | 3 |__________|__________|__________|__________|__________|__ I | | | | | | | | | | | | C | | | | | | | | | | | | E 2 |__________|__________|__________|__________|__________|__ | | | | | | | | | | D | | | | | | | | | | | | | 1 |______S2__|_______S__|_____S1___|__________|__________|__ | | | | | | | | | | | | | | | | | | | | | | | | |__________|__________|__________|__________|__________|___ 10 20 30 40 50 Q U A N T I T Y Connect S to S, S1 to S1, and S2 to S2. Compare the quantities supplied at different prices on SS, S1S1, and S2S2. SUPPLEMENTAL WORKSHEET 2 - GRAPHING A DEMAND CURVE Graph a demand curve for each of the following demand schedules. Graph each on a separate blank graph. Graph 1 Demand for Christmas Trees Price/Tree Quantity Demanded ________________________________________ $10 100 15 80 20 50 25 30 30 15 Graph 2 Demand for Peanuts Price/Pound Quantity Demanded ________________________________________ $ .40 3000 .70 2000 1.00 1500 1.30 600 SUPPLEMENTAL WORKSHEET 2 - INSTRUCTOR KEY (1) Graph 1, Christmas Trees | | | | | | | 30|_______X__|__________|__________|__________|__________|__ | | | | | | | | | | | | | | | | | | | | | | | | 25|__________|_____X____|__________|__________|__________|__ | | | | | | P | | | | | | | | | | | | R | | | | | | 20|__________|__________|_____X____|__________|__________|__ I | | | | | | | | | | | | C | | | | | | | | | | | | E 15|__________|__________|__________|__________X__________|__ | | | | | | | | | | | | | | | | | | | | | | | | 10|__________|__________|__________|__________|__________X__ | | | | | | | | | | | | | | | | | | | | | | | | |__________|__________|__________|__________|__________|___ 20 40 60 80 100 Q U A N T I T Y Connect the X's to complete the demand curve. SUPPLEMENTAL WORKSHEET 2 - INSTRUCTOR KEY Graph 2, Peanuts | | | | | | |__________|__________|__________|__________|__________|__ | | | | | | | | | | | | | | | | | | | | | | | | 1.30|______X___|__________|__________|__________|__________|__ | | | | | | P | | | | | | | | | | | | R | | | | | | 1.00|__________|__________X__________|__________|__________|__ I | | | | | | | | | | | | C | | | | | | | | | | | | E .70|__________|__________|__________X__________|__________|__ | | | | | | | | | | | | | | | | X | | | | | | | .40|__________|__________|__________|__________|__________X__ | | | | | | | | | | | | | | | | | | | | | | | | |__________|__________|__________|__________|__________|___ 1000 1500 2000 2500 3000 Q U A N T I T Y SUPPLEMENTAL HANDOUT 3 - SHIFTS IN DEMAND | | | | | | | 5|__________|__________|__________|__________|__________|__ | D2 | D | D1 | | | | | | | | | | | | | | S | | | | | | | 4|__________|__________|__________|__________|__________|__ | | | | | | P | | | | | | | | | | | | R | | | | | | 3|__________|__________|__________|__________|__________|__ I | | | | | | | | | | | | C | | | | | | | | | | | | E 2|__________|__________|__________|__________|__________|__ | | | | | | | | | | | | | | | | | | | | | | | | 1|__________|__________|__________|__________|__________|__ | | | | | | | | | | | | | S | | D2 | D | D1 | | | | | | | |__________|__________|__________|__________|__________|___ 10 20 30 40 50 Q U A N T I T Y Connect D to D; D1 to D1; D2 to D2. Identify the quantities demanded at different prices on DD, D1D1 and D2D2. SUPPLEMENTAL WORKSHEET 3 - SUPPLY CURVES, DEMAND CURVES, EQUILIBRIUM PRICE Graph supply and demand curves for Christmas trees and peanuts using the following data. Label the supply and demand curves and identify the equilibrium price for each product. Graph 1 Supply of Christmas Trees Demand for Christmas Trees Price/Tree Quantity Supplied Price/Tree Quantity Demanded ____________________________________________________________________ $10 10 $10 100 15 35 15 80 20 50 20 50 25 75 25 30 30 90 30 15 Graph 2 Supply of Peanuts Demand for Peanuts Price/Pound Quantity Supplied Price/Pound Quantity Demanded ___________________________________________________________________ $ .40 1500 $ .40 3000 .70 1900 .70 2000 1.00 2300 1.00 1500 1.30 2700 1.30 600 SUPPLEMENTAL WORKSHEET 3 - INSTRUCTOR KEY Graph 1, Christmas Trees | | | | | | | 30|______D___|__________|__________|__________|____S_____|__ | | | | | | | | | | | | | | | | | | | | | | | | 25|__________|____D_____|__________|_______S__|__________|__ | | | | | | P | | | | | | | | | | | | R | | | | | | 20|__________|__________|_____SD___|__________|__________|__ I | | | | | | | | | | | | C | | | | | | | | | | | | E 15|__________|_______S__|__________|__________D__________|__ | | | | | | | | | | | | | | | | | | | | | | | | 10|____S_____|__________|__________|__________|__________D__ | | | | | | | | | | | | | | | | | | | | | | | | |__________|__________|__________|__________|__________|___ 20 40 60 80 100 Q U A N T I T Y Draw the supply curve by connecting the S's and the demand curve by connecting the D's; the equilibrium price is read on the price axis where the two lines cross ($20). SUPPLEMENTAL WORKSHEET 3 - INSTRUCTOR KEY Graph 2, Peanuts | | | | | | | |__________|__________|__________|__________|__________|__ | | | | | | | | | | | | | | | | | | | | | | | | 1.40|______D___|__________|__________|__________|______S___|__ | | | | | | P | | | | | | | | | | | | R | | | | | | 1.00|__________|__________D__________|___S______|__________|__ I | | | | | | | | | | | | C | | | | | | | | | | | | E .70|__________|__________|_______S__D__________|__________|__ | | | | | | | | | | | | | | | | | | | | | | | | .40|__________|__________S__________|__________|__________D__ | | | | | | | | | | | | | | | | | | | | | | | | |__________|__________|__________|__________|__________|___ 1000 1500 2000 2500 3000 Q U A N T I T Y Connect the S's and the D's to complete the supply and demand curve; the point where they cross is the equilibrium price ($.75). SUPPLEMENTAL WORKSHEET 4 - SUPPLY AND DEMAND REVIEW 1. In the diagram below, a line drawn between which sets of points identifies the following: Demand Curve: _______________ Supply Curve: _______________ P | | B A R | | I | | B C | A | E | A B | |______________________________________ Q U A N T I T Y 2. As the price of milk increases, all other things being equal, the quantity demanded will _________________. a. Increase b. Decrease c. Not Change d. Unknown 3. As the price of an agricultural product increases, all other things being equal, the quantity supplied/will _________________. a. Decrease b. Increase c. Equalize d. Stay the same 4. The equilibrium price of an agricultural commodity is the point at which _________________. a. Demand and price are constant b. Production is stable at a given price c. The quantity supplied equals the quantity demanded d. Sellers will increase the quantity supplied 5. An increase in supply of an agricultural product results in a shift of the supply curve ____________________. a. Downward to the left b. Downward to the right c. Upward to the left d. Upward to the right 6. If an avocado usually costs $1.00 and the price suddenly goes to $1.50, what happens to the following: a. Quantity demanded - increases or decreases b. Quantity supplied - increases or decreases 7. The equilibrium price for a product is influenced by: a. How much it costs for inputs to produce it b. Consumer preferences for the product c. The prices of other similar products d. Consumers' incomes e. All of the above 8. A market surplus will develop if: a. The market price is higher than the equilibrium price b. The market price is lower than the equilibrium price SUPPLEMENTAL WORKSHEET 4 - SUPPLY AND DEMAND REVIEW - INSTRUCTOR KEY 1. Demand Curve B Supply Curve A 2. B 3. B 4. C 5. B 6. A Decreases B Increases 7. E 8. A 12/2/91 LM/GB/sg #%&C