Learning Experience 2.1
Understanding Supply and Demand
Paper Chain Activity
Crude oil is purchased by refineries at a price set by global supply and
demand, and refineries then compete with each other on the world
market to sell their products at the best price they can. This helps to
determine the price that retailers pay for the fuel they sell at their
service stations. When the price of refined fuel rises, retailers pays
more. And when it drops, they pays less. As all retailers have to pay
the price set by market conditions for refined petrol and diesel, the
prices at the pump will tend move up or down at roughly the same
time.
The following exercise is designed to simulate how supply and
demand affects market conditions.
Paper Chain Simulation Activity
Situation – The current fuel market currently produces the product
called the ‘5 Link Paper Chain’ to meet consumer needs. Due to the
essential need for this product by consumers,
demand is high. The production and distribution sector of the ‘5 Link
Paper Chain’ is a highly competitive and sought-after market, and as a
result pricing is reasonably constant between competitors and supply
is readily available.
Aim: To highlight to students how the economic concepts of “supply
and demand” influence market conditions. This simulated activity
using the ‘5 Link Paper Chain’ aims to demonstrate how markets such
as Petrol Sales are affected by supply and demand.
To simulate fuel market competition (i.e. competition for resources,
market shares, superior production practices etc) varying quantities of
glue, paper and scissors will be distributed to groups. Supply and
demand will be demonstrated through the introduction of different
scenarios to the paper chain market.
Task: In groups of 4, using available resources students are to
produce as many paper chains that consist of 5 links, as they can
within 10 minutes. Quality Control insists that links must measure
19cm in circumference and 5 cm in width.
Illustration:
5cm
2cm glue
line
21cm
Each paper link (including cutting and gluing) costs $1.00 to produce.
Each paper link is sold for $1.60 (60c profit margin). Thus $3.00 profit
is made for each 5 link paper chain.
1.
Using the calculations table provided calculate your earnings
and profit for the initial 10 minute production of ‘5 Link
Paper Chains’.
Introduction of Market Scenarios:
The following scenarios aim to simulate ‘like’ situations that may
influence real life fuel markets:
1. Increase in demand - Positive advertising and market success
results in an increase in demand: supply rates remain constant so
demand pushes sale price up to $2.30 (thus $1.30 profit margin). How
does this affect your calculated earnings and profit?
2. Resource shortage - World paper shortages cause a significant
increase in production costs – each paper link now costs $2.00 to
produce due to paper cost increase. Maintaining standard 60c profit
margin takes price to $2.60. Because the good is an essential item,
demand remains high. Supply rates remain constant. How does this
affect your calculated earnings and profit?
3. Improved Technology - A new product on market (the 8 link paper
chain) begins to compete with the 5 link paper chain. To maintain
market share and a steady demand, the profit margins in 5 link chains
need to be cut to 10 cents per link. Supply and demand remain
constant at this new price of $2.10 a link. How does this affect your
calculated earnings and profit?
4. New Products - A huge increase in exports of 8 link paper chains
causes your company to expand into the 8 link paper chain industry
but your existing 5 link chain production means you cannot expand
your production line. Costs have remained steady at $2.00 a paper
link, but because 8 link chains are more popular you are able to
extend profit margins to 80c a link, thus each link is sold for $2.80.
Calculate your production capabilities 8 link chains over a period of 10
minutes of and the resulting earnings and profits.
5. Product Competition - The increased profit margins you are
earning allow for an expansion in your production line of 8 link paper
chains to 20 minutes. Research has also started on the new and
improved 10 link paper chain. This allows your company to exceed
their current supply rates, so slight price cuts and sale prices are
offered to boost demand. Profit margins are cut to 75c and a sales
pitch of “buy one 8 link chain and receive the second 20% off” is
introduced permanently to the market. Calculate your resultant
earnings and profits.
6. Government Tax Increase – The expanding nature of the 8 link
paper chain industry leads to the government wanting a bigger cut of
the industry’s income. As a result the government introduces a new
tax on 8 link paper chain sales. The tax rate is set at 20%. As a result
of the need to maintain profit margins, this causes an increase in link
costs of 15%. The company decides to absorb the other 5%
experienced as a result of the tax introduction. Calculate your
resultant earnings and profits.
7. The New Buyer – An overseas investor signs a trade agreement that
consumes 40% of all 8 Link Paper Chain supplies at a lucrative price of
$3.50 a link but you have no capacity to expand the production line.
As a result supply can no longer meet the demand from other
consumers for 8 link paper chains. The growing demand allows the
company to significantly increase the cost of paper links to $4.20. The
high demand and inability for supplies to be bolstered means sales will
remain strong.
Paper Chain Record Sheet
Initial 10 Minute Production of 5 Link Paper Chains
Scenario
Number of
‘Quality
Controlled’ Paper
Chains Produced.
Cost of
Production
($)
Total
Earnings
($)
Profit ($)
Initial 10 Minute
Production
Scenarios
Scenario
1. Increase in
demand.
2. Resource
shortage.
3. Improved
Number of
‘Quality
Controlled’
Paper Chains
Produced.
Cost of
Production
($)
Total
Earnings
($)
Profit ($)
technology.
4. New products.
5. Product
competition.
6. Government Tax
Increase.
7. The new buyer.
What do I now know?
What do you understand about the economic terms ‘supply’ and
‘demand’?
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In this activity if paper represents ‘crude oil’, scissors and glue
represents ‘oil refining’, paper chains represent ‘fuel products such as
unleaded petrol and diesel’ and quality control represents safe,
reliable and environmentally responsible operations, what are some of
your initial thoughts about the fuel industry?
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Imagine the Paper Chain activity that you have completed is a real life
business that you are involved in (i.e. you are involved in fuel
production and distribution). Based on the different scenarios that you
faced complete a S.W.O.T. analysis of your business.
Strengths
Weaknesses
Opportunities
Threats
Based on this simulation activity, what are some of the market trends
(what has happened in the market? How do you predict the market will
develop in the future?). Summarise your thoughts in point form.
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Consider each different scenario and think of some ‘real-life’ situations
that might influence the fuel market. If you have a limited
understanding of some of the factors impacting on the fuel market,
read the scenarios and take an educated guess – over the next few
lessons these issues will be explored further. Some keyword clues are
provided to assist your thinking.
Scenario
Increase in demand
Keyword Clues
Global
Development.
Reliance on
motor vehicle.
Resource shortage
Crude Oil
Supplies.
Improved technology
Improved
refining
methods.
Alternative fuels.
Environment.
New Products
LPG, high octane
petrol, lowsulphur diesel,
alternative fuels.
Product Competition
Supermarket
discount fuels
e.g. Coles and
Woolworths
Government Tax
Increase
State and
Federal
Government Fuel
Taxes.
New Buyer
Industrial
Development –
China, India …
Real-Life Situations
Evaluation
Although the Paper Chain Activity required you to engage in a series of
economic concepts that simulated the fuel market, you also had to use
essential group cooperative skills to gain full benefit from the activity.
Complete a Y-Chart to reflect on your experiences during the activity –
consider how your group approached the activity.
I SAW
I HEARD
I FELT
After completing the Y-Chart consider your thoughts and organise
them (and any additional thoughts) into a P.M.I. chart (Pluses, Minuses
and Interesting) to reflect on your group’s ability to work cooperatively
together to complete the activity:
Pluses
Minuses
Interesting
Complete the following questions:
1.
What did you like best about the way your group worked?
Why?
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2.
What did you like least about the way your group worked?
Why?
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3.
What specific things helped your group complete the task
successfully? How?
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4.
What specific things hindered your groups ability to complete
the task successfully?
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5.
Use the paragraph framework to respond to the following
reflective question:
“How has the ‘Paper Chain Activity’ helped develop your
understanding of the fluctuating market characteristics of the
fuel industry?”
Paragraph Framework
The main idea of the paragraph is …
“How has the ‘Paper Chain Activity’ helped develop your understanding
of the fluctuating market characteristics of the fuel industry?”
THINK
PLAN
Statement (Topic Sentence T.S.)
Explanation (Developing Sentence D.S.)
Examples (Supporting Sentence S.S.)
Conclusion (Concluding Sentence C.S.)
WRITE (Identify each type of sentence using T.S.[ST], D.S.[EXP], S.S.[EG], C.S.[CON]).
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EDIT
( ) Spelling
( ) Keywords
( ) Punctuation
( ) Grammar
( ) Sentences
PRESENT
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