MoneyWise Lesson #5 The How & Why of Prices

Exercises:
In questions 1 4, state whether the following events will affect demand or supply. (Note: for the purposes of this exercise, each event will affect only one, supply or demand.) Which way will the price go in each of the instances below? Explain your answer. 1. An earthquake hits Los Angeles. People want to buy chainsaws to cut and clear away the fallen trees. Is this a change in the supply or demand of chainsaws? Is it an increase or a decrease? What will happen to the price of chainsaws? Why? Is this a rip-off? 2. Improved technology lowers the costs of producing computers. Is this a change in the supply or demand of computers? Is it an increase or a decrease? What will happen to the price of computers? Why? Is this a rip-off? 3. It is the first day back to school. Students are all going to school and no longer going to the beach. Is this a change in the supply or demand of swimsuits? Is it an increase or a decrease? What will happen to the price of swimsuits? Why? Is this a rip-off? 4. A frost hits Redlands and Riverside, California, wiping out much of the orange crop. Is this a change in the supply or demand of oranges? Is it an increase or a decrease? What will happen to the price of oranges? Why? Is this a rip-off? 5. It is the end of summer and the price of strawberries has gone up dramatically. Your friend claims that strawberry growers are ripping us off. How do you respond? 6. It is Valentines Day and you want to buy a dozen roses for your very special friend.until you discover that the price of a dozen roses is $100. Why do you think that the price is so high? Is it a ripoff? What are your alternatives? What do you do? 7. Look in your local newspapers or other news sources and find four price changes that have occurred recently. Explain whether each price change was caused by an increase or a decrease in supply or demand. 8. Using the Internet, research the price of oil over time for the past 50 years. Use inflation adjusted or constant dollar data (hint: search for inflation adjusted oil prices) Identify key price changes and associate them with probably causes and/or world events. Was the price change due to to supply or demand changes? Explain.

9. Put the letter R in the space if you think that the situation is a rip -off. Place the letter S in the space if you think that the price change is a result of a change in supply, and the letter D in the space if you think the price change is a result of a change in demand, and the letter N if you think the situation is none of these. a. ______ Oil prices increase because of a strike by oil workers in Venezuela. b. ______ Rickys new watch quits working. He got it wet and it is not waterproof. No one said it was but he assumed it was. c. ______ The price of ski and snowboard equipment falls at the end of the winter. d. ______ Gasoline prices increase in the summer. e. ______ Prices of a sports teams jerseys, hats, etc. increase after they win the national championship. f. ______ Mrs. McGillicudy loses her life savings because her financial planner lied to her about the risks involved.

Self test:
1. Rank these products in terms or relative scarcity with 4 being the most scarce and 1 being the least scarce. _________ A CD _________ A Childs Tricycle _________ A New Car _________ A Candy Bar 2. State the law of demand 3. State the law of supply

Multiple Choice Questions:

1. In a competitive market, which of the following is NOT true about the price of a product? The price a. provides information to demanders and suppliers. b. reflects the relative scarcity of the product. c. reflects the moral value of the product. d. is determined by demand and supply. 2. In a competitive market, prices are determined by: a. corporations b. government c. supply and demand d. wants and needs

3. The number that indicates the relative scarcity of a product is the: a. price b. supply c. demand d. quantity 4. Which of the following occurs in the market for flashlights when a power outage occurs that is likely to last for several days? a. demand for flashlights decreases b. price of flashlights rises c. flashlights becomes relatively less scarce d. supply decreases