Supply and Demand

In 1958, Wham-O, Inc. began marketing the Hula Hoop in the United States. Sales of the Hula Hoops skyrocketed during the year, in the first months over 25 million were sold, within the year over 100 million. Similarly today, Silly Bandz have taken off in sales since the summer of 2008. According to Robert J. Croak, founder of Brainchild Product the company, which produces Silly Bandz a small warehouse in Toledo, Ohio, has gone from shipping 20 boxes a day to about 1,500.

In 1994, the film The Hudsucker Proxy portrays a fictionalized account of the demand for Hula Hoops as they were introduced into the market.  

Watch this clip from The Hudsucker Proxy and discuss how the supply and demand for Hula Hoops interacted with prices. As they view the video, ask students to think about the following questions: Why does a business owner lower the price of products that are not selling quickly? When would a business owner have the incentive to raise prices? What does a higher price than before for a good or service communicate to consumers about the demand for that product?

www.youtube.com/watch?v=Ng3XHPdexNM
*Note this clip requires the ability to view YouTube, use of it may require prior download or permission.

Today, Brainchild Products, the makers of Silly Bandz are experiencing a large increase in demand for their products similar to that of Hula Hoops in 1958. The rise in demand for Silly Bandz; however, has not as yet been accompanied by a rise in the price for the product. Instead producers of Silly Bandz have responded by largely increasing their production of Silly Bandz.

In order to gain some background information about the demand for Silly Bandz, take a look at the following news stories from ABC and USA Today. Remind students to be thinking about the video clip from Hudsucker Proxy and to apply what they learned about demand and its relationship to prices. Pose these questions: What information is being communicated to the business owner by the $5 price of Silly Bandz? What can the business owner do to ensure that the Silly Bandz are allocated to those consumers, which value them the most?
abcnews.go.com/Nightline/video/silly-bandz-latest-fad-11686769
www.usatoday.com/money/smallbusiness/2010-07-01-sillybandz01_CV_N.htm

PROCESS

1. Explain and/or introduce the laws of supply and demand. The Law of Supply states, that as the price of a good or service that producers are willing and able to offer for sale during a certain period of time rises (or falls), the quantity of that good or service supplied rises (or falls). The Law of Demand states, as the price of a good or service that consumers are willing and able to buy during a certain time period rises (or falls) the quantity of that good or service demanded falls (or rises). 

2. Explain and/or introduce the economic concepts of equilibrium, shortage, and surplus. Equilibrium is the price at which the quantity demanded by buyers equals the quantity supplied by sellers also called the market-clearing price. At the equilibrium price every buyer finds a seller and every seller finds a buyer. A surplus is the situation that results when the quantity supplied of a product exceeds the quantity demanded. This generally happens because the price of the product is above the market equilibrium price. A shortage is the situation that results when the quantity demanded for a product exceeds the quantity supplied. This generally happens because the price of the product is below the market equilibrium price.

3. Use the Supply and Demand Part 1 and Supply and Demand Part 2 on supply and demand to review the two concepts with students. (When students open the interactive tutorials have them hit the full screen button in order to see them more clearly, it is located on the top right-hand side next to the go to lesson link. It might not be fully in view. To navigate the slides a white arrow will appear in the corner. Have students click on the arrow, as it appears to move on to the next slide.) The tutorial  graphical gives examples, which show students in the interaction between quantities supplied and demanded at different prices. It then walks the students through the concepts of equilibrium, surplus and shortage, providing graphical examples for each. Finally, students can use the tutorial to see how increases or decreases in supply/demand are graphed, and their impact on prices and quantities supplied or demanded.

4. From the information presented in the video clip from The Hudsucker Proxy and the Hula Hoops Case Study can be used to examine the changes in demand shown in the video. Students are walked through three different supply and demand schedules and shown graphically how the demand line for Hula Hoops changed from the introduction of the Hula Hoops into the marketplace to the height of their popularity in 1958.

5. Using their knowledge of the Law of Supply and the Law of Demand and the Hula Hoops Case Study, ask students to go through the news article and video clip on the market for Silly Bandz. Then use the Silly Bandz Case Study to examine whether the current price of $5, for a package of Silly Bandz represents an equilibrium price. If not, what can the producers of Silly Bandz do in order to provide more of their product to consumers?
 

ASSESSMENT ACTIVITY

Answer the following questions: 

Supply and Demand Questions

1. Draw a supply and demand graph and label the necessary parts. Be sure to properly label the locations of price, quantity, supply, demand, equilibrium price, surplus, and shortage.

Should Look Like This:

Supply and Demand Graph Answer

Choose the best answer.

2. Why does the supply curve slope up and to the right?

1. As the price rises the quantity supplied by producers will fall.
2. [As the price falls the quantity supplied by producers will rise.]
3. As the price rises the quantity supplied by producers will rise. 

3. Why does the demand curve slope down and to the right?

1. As the price falls the quantity demanded by consumers will fall.
2. [As the price rises the quantity demanded by consumers will fall.]
3. As the price rises the quantity demanded by consumers will rise.

4. If the quantity supplied exceeds the quantity demanded, then there is a _______ in the market.

1. [Surplus]
2. Shortage
3. Supply

5. If the quantity demanded exceeds the quantity supplied, then there is a _______ in the market.

1. Supply
2. [Shortage]
3. Demand

CONCLUSION

The laws of supply and demand can be used to show the relationship between producers and consumers. Prices are used in the market to help producers and consumers communicate with one another. The value-scales of producers and consumers are coordinated through the price system. If the supply of a product matches the demand for the product, the price is said to be at equilibrium and the quantity supplied will match the quantity demanded. If the price of a product is too high, then supply will exceed the demand, and there will be excess supply or a surplus of goods or services. If the price of a product is too low then demand, will exceed supply and there will be excess demand or a shortage of goods or services.

The case studies for Hula Hoops and Silly Bandz exemplify how changes in demand for consumer products can shift tremendously over short time periods. The video clip from the Hudsucker Proxy provides an example of how prices are changed in response to demand. Prices will rise or fall based on the supply and demand for goods or services. The change in demand for Hula Hoops initially decreased the price due to a lack of demand. Subsequently demand sky-rocketed for Hula Hoops and led to a large increase in the price level, as consumers who wanted to buy a Hula Hoop were willing and able to pay more for the toy. Today, we have seen a similar rise in demand for Silly Bandz, however the price level for Silly Bandz has not risen. Producers of Silly Bandz are sensitive to the idea of raising the price for their product; part of their marketing strategy is that their toy is a cheap alternative to video games and other children's toys that are more expensive. Given their unwillingness to raise prices, continued excess demand can only be met by increasing the supply, which includes substitute brands entering into the market and gathering market share.