Basic Supply and Demand: Second Grade Social Studies

Supply and demand are the two economic forces that interact in markets to determine how many goods are produced and what prices consumers pay.

The Dance of the Marketplace

Have you ever wondered why strawberries cost more in the middle of a snowy January than in the warm sunshine of June? Or why a popular toy that every child wants for winter holidays suddenly becomes expensive or hard to find on store shelves? The answer lies in the fundamental economic laws of supply and demand.

+-------------------------------------------------------------+
|                  THE TWO FORCES OF COMMERCE                 |
+-----------------------------+-------------------------------+
|           SUPPLY            |            DEMAND             |
|   (The Amount Available)    |   (The Desire to Buy)         |
+-----------------------------+-------------------------------+
| The quantity of a good or   | The quantity of a good or     |
| service that producers have | service that consumers want   |
| available to sell           | and are willing to pay for    |
+-----------------------------+-------------------------------+

Understanding Supply

Supply is the total amount of a specific good or service that producers are able and willing to sell at a particular price.

High Supply vs. Low Supply

When farmers have a bumper harvest of juicy watermelons in July, the supply of watermelons is high. Grocery store bins overflow with green melons. Conversely, if an early spring frost destroys orange blossoms in Florida, citrus groves produce very few oranges. In that case, the supply of oranges is low.

       HIGH SUPPLY: Warehouse packed full of boxes of toys.
       LOW SUPPLY:  Only two boxes left on the entire shelf.

Understanding Demand

Demand is how much consumers want to purchase a good or service and how much they are willing to pay to get it.

High Demand vs. Low Demand

If an author writes a thrilling new storybook that all second graders are eager to read, the demand for that book is high. If an ice cream truck drives through a neighborhood on a freezing, blustery winter afternoon with blowing snow, the demand for cold popsicles is low.

       HIGH DEMAND: Long line of fifty people waiting to buy tickets.
       LOW DEMAND:  Empty store aisles with no customers looking.

How Supply and Demand Set Prices

In a free market economy, prices act like traffic signals that balance supply and demand.

+---------------------+---------------------+-------------------+
| SUPPLY SITUATION    | DEMAND SITUATION    | EFFECT ON PRICE   |
+---------------------+---------------------+-------------------+
| High Supply         | Low Demand          | Price goes DOWN   |
| (Too much extra)    | (Few buyers)        | (Discount/Sale)   |
+---------------------+---------------------+-------------------+
| Low Supply          | High Demand         | Price goes UP     |
| (Very rare/scarce)  | (Many buyers)       | (More expensive)  |
+---------------------+---------------------+-------------------+

Scenario 1: High Supply and Low Demand (Prices Drop)

Imagine a shoe store orders five hundred pairs of neon green winter snow boots. By February, winter was unusually warm, and only twenty customers bought the boots. The store owner has four hundred and eighty unsold boots taking up precious storage space. To convince shoppers to buy them, the owner puts up a large sign: "50% OFF SALE!" When supply is high and demand is low, prices fall.

Scenario 2: Low Supply and High Demand (Prices Rise)

Now imagine a small local bakery that bakes only twenty chocolate pies each Saturday morning. One morning, sixty hungry customers arrive, all eager to buy a chocolate pie! Because demand is far higher than the scarce supply, the baker can raise the price of each pie from five dollars to eight dollars. Even at the higher price, all twenty pies sell out instantly. When supply is low and demand is high, prices rise.

                 THE PRICE SEESAW
      High Demand + Low Supply  ===>  PRICE GOES UP!  (/\)
      Low Demand  + High Supply ===>  PRICE GOES DOWN! (\/)

Finding Market Equilibrium

Market equilibrium occurs when the amount of goods that producers supply matches exactly the amount of goods that consumers want to buy at a fair, agreed-upon price. At this price point, stores do not have massive piles of unsold items rotting on shelves, and shoppers do not find empty aisles.

Producers Respond to Demand

Producers pay close attention to consumer signals. If toy makers notice that children are no longer playing with mechanical yo-yos and instead love magnetic building tiles, factories stop making yo-yos and retool their machines to produce magnetic tiles. In a market economy, consumers cast votes with their dollars, guiding what factories produce.

Exercises and Review

Exercise 1: Define supply, define demand, and explain what happens to the price of an umbrella on a sunny, cloudless day versus a pouring rainy day.

Exercise 1 Solution: Supply is the total amount of a good or service available for sale, while demand is how much consumers want to buy that good or service. On a sunny, cloudless day, consumer demand for umbrellas is very low, so store owners might lower prices or offer sales to attract buyers. On a pouring rainy day with commuters caught in downpours, demand for umbrellas skyrockets, and vendors can sell umbrellas quickly even at higher prices.

Exercise 2: If a sudden frost destroys half of the apple trees in an apple-growing state, what happens to the supply of apples, and what will likely happen to the price of apple cider at grocery stores?

Exercise 2 Solution: If an early frost destroys half of the apple crop, the supply of apples drops significantly, creating low supply. Because apples are scarce and fewer gallons of apple cider can be pressed, the high consumer demand for cider combined with low supply will cause the price of apple cider at grocery stores to rise.