This Activity is based around an interactive resource that has been developed by Biz/ed. It will guide you through some of the basic issues surrounding demand and supply curves. It is very important to remember that the whole purpose of using these diagrams is to help us to represent what might happen in reality. Economists call this process 'modelling'. Models are attempts to simplify relationships in the economy in order to help us to understand something of what happens and to make predictions about the outcome of events. It must be appreciated that they have limitations, but in many ways these limitations are useful in helping us to understand why things in reality may be different. For example, the model of the market system assumes lots of things that in reality don't exist: so, price does not always rise in response to increases in demand. If we observe that this is not the case in reality, we can then explore what the reasons might be and this helps us to develop our understanding.
At the end, there is some information about the heat wave experienced in the UK in the summer of 2003. You will be asked to make some predictions about what might have happened to prices of some goods and then research what actually happened!
Please note: to make full use of the Activity, your system must have Macromedia Flash Player 6 (or higher) installed - this can be obtained from the Macromedia Web site. Interactive Macromedia Flash resources developed by Biz/ed are designed to work both with and without the use of a mouse and be compatible with as many assistive technologies as possible (further information on our accessibility features). If you cannot view the interactive resources for whatever reason a static annotated image will appear instead, if you cannot view the static image it will be replaced by some descriptive text.
Diagram 1 represents the basic relationship between the demand for a product or service and the price. Use the slider to see what happens to the demand for this product at different prices. (To move the slider click and drag it with the mouse or highlight the Flash resource by stepping through the sections of this page using the Tab key and then use the Up and Down cursor keys when the relevant slider is highlighted. NB if nothing appears below you should make sure your Flash player is up to date.)
Explain the relationship in your own words.
What reasons might there be for consumers to be reluctant to purchase an item at higher prices? (Hint - think about the factors influencing demand!)
Look at diagrams 2 and 3.
Diagram 2:
Diagram 3:
Choose a price and explain what the level of demand is at this price in each of the demand curves in 1, 2 and 3. What do you notice about the level of demand in each case?
Now choose a higher price and explain what happens to the level of demand in each case. Why do you think this is?
In reality, demand changes at regular intervals. It is the movements in demand and supply that create market forces and put pressure on prices. Prices act as signals to consumers and producers and may influence our behaviour.
Choose a product or a service and explain what could cause the demand for your product or service to rise and fall.
Diagram 4 represents the basic relationship between the supply of a product or service and the price. Use the slider to see what happens to supply for this product at different prices. Explain the relationship in your own words. (To move the slider click and drag it with the mouse or highlight the Flash resource by stepping through the sections of this page using the Tab key and then use the Up and Down cursor keys when the relevant slider is highlighted.)
Diagram 4:
What reasons might there be for producers wanting to offer more for sale at higher prices? (Hint - think about the factors influencing supply!)
Look at diagrams 5 and 6.
Diagram 5:
Diagram 6:
Choose a price and explain what the level of supply is at this price in each of the supply curves in 4, 5 and 6. What do you notice about the level of supply in each case?
Now choose a higher price and explain what happens to the level of supply in each case. Why do you think this is?
Having looked at this basic relationship, we are going to look at how effective our model is in explaining real events.
The Heatwave of 2003
During the summer of 2003, the UK experienced record temperatures as a heatwave swept across the country. The hot weather encouraged people to visit coastal regions for the weekend, to take short break holidays in the UK rather than abroad and to get outside to enjoy the sunny weather. Such a scenario is likely to have an impact on the demand and supply of a number of different items.
Look at the items below:
Ice creams
Pimms
Beer
Wheat
Hotel rooms
Lettuce
Barley
Barbeque charcoal
Beef burgers
Maize
Garden swings
Explain what you think is likely to happen to the demand and the supply of these items. Try to offer some ideas as to how far the demand and supply would change and why.
What would you expect to happen to the price of these items? Explain your answer fully.
Now you have made some predictions, let's look at some facts:
Sales of ice cream doubled in some parts of the country.
Hardware stores reported sharp increases in the sales of garden swings and barbeque charcoal.
Sales of Pimms rose by 300% compared to the same period the year before; beer sales also rose dramatically.
Sales of salad items and barbeque food rose by around 40%.
Hotel bookings at many resorts were significantly up on last year and in many places a reservation was hard to find!
Supply of wheat, rice, maize and barley look as though they could be hit badly as predictions for harvests look gloomy.
The price of most ice creams, salad items and so on did not rise in general during the heat wave although there may have been some differences on a regional basis. The likes of Tesco and Sainsbury would almost certainly not have raised prices but some local ice cream sellers may well have done. How would you explain this?
The price of grain following the summer was predicted to rise. What impact might this increase in price of wheat, barley and maize have on other markets?
