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A final review applying supply, demand, and competition to a relatable business scenario.
Imagine it is the hottest day of the year and you have the only pitcher of ice-cold lemonade on the block. Should you sell a glass for 50 cents, or could you get away with charging five dollars?
In economics, everything revolves around two big ideas: Supply and Demand. Supply is how much of something you have available to sell (like your 10 gallons of lemonade). Demand is how much people actually want to buy it. Think of them like a seesaw. When it is 100 degrees outside, Demand is very high because everyone is thirsty! When demand is high but supply is low, you can usually charge a higher Price. But if it starts raining, demand drops, and you might have to lower your price just to sell a single cup.
Quick Check
If you have 50 cups of lemonade (Supply) but only 2 people want to buy some (Demand), should you raise or lower your price?
Answer
You should lower your price to encourage more people to buy your extra supply.
Let's see how much you earned on a sunny Monday: 1. You bought lemons and sugar for 0.50 each. 3. Total Sales: 4. Profit:
Your profit for the day is .
Quick Check
If your lemon costs double from 10.00, but you still only sell $10.00 worth of lemonade, what is your profit?
Answer
Your profit would be $0.00 (you broke even).
Competition happens when another person sells the same thing as you. If a new stand opens across the street, you are now competing for the same customers! This usually leads to lower prices for the customers. To win, you have two choices: Price Competition (making your lemonade cheaper than the other stand) or Non-Price Competition (making your lemonade better by adding fresh strawberries or giving away a free cookie with every cup).
You and your neighbor both sell lemonade. 1. You sell yours for 0.75. 3. Most customers go to the neighbor because the price is lower. 4. To get customers back, you decide to charge $0.70 or offer a 'Buy One Get One Free' deal. This is competition in action!
Real business owners have to react to many changes at once. This is called a Market Shift. Imagine a heatwave hits (Demand goes up), but at the same time, a lemon shortage makes prices skyrocket (Supply cost goes up). You have to find the 'Sweet Spot'—a price high enough to cover your expensive lemons, but low enough that thirsty people will still pay for it.
Scenario: A heatwave doubles your demand, but a lemon shortage triples your costs. 1. Original Cost per cup: . New Cost: . 2. Original Price: . 3. If you keep the price at , your profit per cup drops from to . 4. Because demand is high (it's hot!), you can raise your price to . 5. New Profit per cup: . You actually made more money by reacting to the market!
What happens to the price of lemonade on a very cold, rainy day?
If your total sales are 12.00, what is your profit?
Adding a 'Free Sticker' to every cup sold is an example of non-price competition.
Review Tomorrow
In 24 hours, try to explain to a friend the difference between 'Supply' and 'Demand' using a toy or a snack as an example.
Practice Activity
Next time you are at the grocery store, look for two different brands of the same item (like cereal). Which one is cheaper? Why do you think people might buy the more expensive one?