Current events:
Today's lesson plan and HW is available on the blog: http://gmicksmithsocialstudies.blogspot.com/
Email: gmsmith@shanahan.org
The Shanawiki page (http://shanawiki.wikispaces.com/) has updated class information.
LibraryThing has bibliographic resources.
I moved the "Blog Archive" to the top right on the blog page so it should be easier to find the daily lesson, HW, and other class material.
Chapter Three, Demand and Supply
PowerPoint Presentation
Discussion from Friday: Questions for discussion on Shanawiki: Demand: Hybrid Cars
Question: Sales of hybrid cars are on the rise. The Toyota Prius, while priced above comparable gasoline-only cars, is selling well. Other manufacturers are adding hybrids to their lines as well. What has been the cause of the rising sales of hybrids? Is this an increase in demand or an increase in quantity demanded?
Supply: iPods, iTunes, and MP3 players
Question: What has been the impact of the iPod, iTunes, and MP3 players in general
on high-end stereo equipment sales? Has the same impact been at work with CD
music sales since downloading of individual songs was introduced by Apple?
Equilibrium: China and India
Question: As China and India (both with huge populations and rapidly growing
economies) continue to develop, what do you think will happen to their demand for
energy and specifically oil? What will suppliers of oil do in the face of this demand? Will this have an impact on world energy (oil) prices? What sort of policies or events could alter your forecast about the future price of oil?
Extended Examples in the Chapter
Putting Demand and Supply to Work
Both of the following examples use supply and demand analysis as a framework for
predicting how market participants will act, and what the resulting price and output might be.
Excess Grape Supply and Two-Buck Chuck
The great California wine of the 1990s put California wine on the map. Demand,
prices, and exports grew rapidly. Over planting of new grape vines was a result.
Driving along Interstate 5 or Highway 101 north of Los Angeles, grape vineyards
extend for miles as far as the eye can see, and most were planted in the mid to late 1990s. The 2001 recession reduced the demand for California wine, and a rising dollar made imported wine relatively cheaper. The result was a sharp drop in demand for California wine and a huge surplus of grapes. Bronco Wine Company President Fred Franzia made an exclusive deal with Trader Joe’s (an unusual supermarket that features exotic food and wine products), bought the excess grapes at distressed prices, and with his modern plant produced inexpensive wine under the Charles Shaw label. Selling for $1.99 a bottle, Two-Buck Chuck as it is known is available in Chardonnay, Merlot, Cabernet Sauvignon, Shiraz, and Sauvignon Blanc. Consumers have flocked to Trader Joe’s and literally haul cases of wine out by the carload. Today, Two-Buck Chuck sells well over a million cases a month. This is not rot-gut: the 2002 Shiraz beat out 2,300 other wines to win a double gold medal at the 2004 28th Annual International Eastern Wine Competition.
Two-Buck Chuck was such a hit that other supermarkets were forced to offer their
own discount wines. This good, low-priced wine has had the effect of opening up
markets. As an illustration can be demonstrated, people who previously avoided wine because of the cost have begun drinking more (demand curves do slope down and to the right).
As The Economist has noted, the entire industry may benefit because “Wine
drinkers who start off drinking plonk often graduate to upmarket varieties.”
For more information about this wine and conditions in the wine industry, visit the following Web sites:
From CBS News, a story titled “ ‘Two Buck Chuck’ Wine Cult” points out that it is
the surplus of grapes that makes the wine so inexpensive. On the web at: http://
www.cbsnews.com/stories/2003/06/02/eveningnews/main556620.shtml
KTVU.com (from the Bay Area of California) has a story titled “‘Two Buck Chuck’
Changing Wine Habits” which makes the point that “quality does not necessarily follow price.” http://www.ktvu.com/consumer/1954524/detail.html
Trek Bikes and Lance
When Lance Armstrong won his seventh Tour de France cycling championship in
July, 2005, he rode a bicycle made by Trek of the United States.2 So on the demand
side, we can expect demand for the victor’s brand of bicycles to go up. This in fact happened, in both the United States and Europe. On the supply side, U.S. bicycle manufacturers such as Trek and Cannondale were willing to increase output as shown in Figure 15 (note that the supply curve didn’t change, only quantity supplied).
This process worked well in the U.S. but proved tougher in Europe, not so
much in the actual production of the bicycles but in getting stores to stock them. Up to a few years ago, racing bicycles were almost exclusively made by European companies.
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1 “California Drinking,” The Economist, June 7th, 2003, p. 56.
2 See Ian Austen, “U.S. Bike Makers Seek Dominance in Europe,” The New York Times,
December 30, 2003, p. W1.
The Market for Bicycles
Using our supply and demand analysis, we see that demand increased. Since no
determinant of supply changed, we know that just output will increase, and prices
for Trek bicycles will rise. Our supply and demand analysis gives us a useful framework for predicting how market participants will act, and what the resulting price and output might be.
For More Information
In an article titled “Trek Bicycle Coup: Tour de Force” in Baseline (on the web at
http://www.baselinemag.com/article2/0,1397,1618016,00.asp), the author details the
technology used in making the bikes, as well as providing data on prices and quantities.
The phrase “limitless tolerance on price” is a good introduction to the topic
of elasticity (to be covered in an upcoming chapter).
Examples Used in the End-of-Chapter Questions
Question 10 discusses the market for virtual goods. Based on Rob Walker, “The
Buying Game: A real market, overseen by a real corporation selling things that don’t really exist,” (The New York Times Magazine, October 16, 2005, p. 28), the question asks students to consider the markets for goods used in on-line games such as EverQuest II. This example encourages students to see that markets “really” exist even in “virtual” worlds.
For a further demonstration, visit the homepage of Second Life (at http://secondlife.com/) and see how much in U.S. dollars has been spent…in just 24 hours!
Question 11 is based on a Wall Street Journal story by Peter Sanders and Stephanie
Kang, (“Wipeout for Key Player in Surfboard Industry,” The Wall Street Journal,
December 8, 2005, p.B1) that discusses the closing of Clark Foam. The key point of
the example is that the firm was a manufacturer of a critical input needed to make
surfboards. It provides a good illustration about how a change in price and availability of a resource carries over into product markets.
For another story and some good visuals, see the page on the web at http://www.
transworldsnowboarding.com/twbiz/features/article/0,21214,1138359,00.htm.
Question 12 examines the effect of increased demand in the market for polysilicon,
used in making solar panels. It is based on the story by John Carey, “What’s Raining on Solar’s Parade” (Business Week, February 6, 2006, p. 78). The key point for discussion here is the impact of uncertainty, which is another way to talk about the role of expectations on demand and supply.
For more about the dynamics of the polysilicon market, see the story from IndustrialControl Designline on the web at http://www.industrialcontroldesignline.com/
showArticle.jhtml?printableArticle=true&articleId=163701891.
Question 13 provides a good example of how synthetic substitute products can be
developed when “natural” products become scarce. Based on the story by James
Altucher, “Supply, demand and edible orchids” (The Financial Times, September
20, 2005, p.12), it presents students with a data set, requires them to graph and analyze the data, and then illustrate the effects of changes in demand and supply.
Particular attention is given to the idea that even as supply is changing, demand may also be changing (in this case, due to the development of a synthetic).
Did you know that vanilla is the most labor-intensive agricultural product in the
world? You can find out just about everything there is to know about vanilla on the web at http://www.vanilla.com/html/facts-faq.html.
For Further Analysis
The Supply and Demand Effects of the Increased Use of Ethanol
Handout 3-1 is an in-class group exercise with your small group.
Students are asked to draw graphs illustrating shifts in demand and supply
and changes in quantity demanded and supplied. Asking students to document
research about specifics in this topic (for example, changes in planted acreage).
Learning objectives: application of concepts of changes in quantity demanded
and quantity supplied versus changes in demand and supply; demonstration of mastery of graphing techniques; and reinforcement of critical thinking skills.
Web-based Exercise
What’s Been Driving Gasoline Prices?
This example can be used as an in-class group exercise.
Asking students to perform (and document) additional research allows you
to use it as a case study or group project as well. For example, students can be
asked to document gasoline sales to see if, as predicted, an increase in demand
results in both a higher price and a greater quantity sold.
Learning objectives: application of concepts of changes in quantity demanded
and quantity supplied versus changes in demand and supply; demonstration of mastery of graphing techniques; and reinforcement of critical thinking skills.
The Supply and Demand Effects of the Increased Use of Ethanol
Draw a supply and demand graph showing the market for corn in equilibrium. Label the demand curve as “DOld” and the supply curve as “S”. Then illustrate the effect of an increased demand for corn due to its being used to produce ethanol. Explain the changes in price and equilibrium quantity using the vocabulary of “changes in quantity demanded,” and “changes in quantity supplied,” as well as “change in demand” and “change in supply.”
Use a supply and demand graph to illustrate and explain the impact of a higher price of corn on any one of a wide variety of food products; be sure to include the effect on the cost of high-fructose corn syrup.
Send HW in email to gmsmith@shanahan.org for this exercise.
Define the following terms:
1. Market
2. Price system
3. Demand
4. Law of Demand
5. Demand curve
6. Horizontal summation
7. Determinants of demand
8. Normal goods
9. Inferior goods
10. Substitute goods
11. Complementary goods
