The Law That Rules

 


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The Law that Rules is the article written by Steven Rosen and posted in “kansascity dot com" on March 27, 2005. Steven Rosen once a month offers basic economic concepts that can be easily explained to kids, so they can form their vision of how the real-adult world works. This time Rosen’s ninth installment (that is the way he calls his articles; altogether there will be twelve installments) explained the basic rule of economics: the rule of supply and demand. He explains the law of supply and demand using dolls, stuffed animals, trading cards, plastic wristbands and other things that kids like to collect. Kids’ collectibles are the things that they will be most willing to spend their money on.

The topic of supply and demand was chosen because it is a necessarily starting point for understanding how the prices are formed. As examples that will be easily comprehendible by kids the author uses prices for pizza, toys, and iPods. Kids would buy all those things with their money, so it is a real life example that is closer to them than for example the formation of prices for oil.

Rosen explains supply as the amount of a product or service that a business is willing to offer for sale; and demand as how much purchasers would buy and what they'd pay. Supply deals with production and demand with desire and popularity. Rosen is pretty close in his explanations, however, if we want to be precise in definitions then we will have supply as the quantity that producers are willing to sell at a given price. For instance, the soft drink manufacturer may be willing to produce 1 million packages of some soft drink if the price is $1 and significantly more if the market price is $2. The core determinants of the amount of packages of a soft drink that a company is willing to produce will generally be the market price of the good. Demand is the quantity that consumers are willing and able to buy at a given price over a period of time. For an illustration, a consumer may be willing to purchase 30 packages of a soft drink in the next year if the price is $1 per bag, and may be willing to purchase only 10 bags if the price is $2 per package. A demand schedule can be constructed that shows the quantity demanded at each given price. It can be represented on a graph as a line or curve by plotting the quantity demanded at each price. It can also be described mathematically by a demand equation. The main determinants of the quantity one is willing to purchase will typically be the price of the good, one's level of income, personal tastes, the price of substitute goods, and the price of complementary goods.

To make this concept simpler to children the author suggests asking children questions about the things that they collect. For instance, ask why some particular toy is special and more valuable than another one. The answer would probably be that particular items are limited or have unique design. Then Rosen proposes to go further and question kids what their actions would be if their friends or neighbors had an identical toy. Would they desire to exchange it? For how much would they price it? If, on the other hand, only one friend had it, would it increase the demand and what would the price be in that case? Rosen also tells to construct open-ended questions for kids, this way kids receive an opportunity to present their vision of the situation which significantly speeds up their understanding of the market. By using the examples that Rosen suggests, kids automatically get the idea of the price elasticity of demand and price elasticity of supply.

The author also gives other suggestions of explaining the rule of demand and supply. One of the cases is the formation of prices for fuel. Actually, supply and demand is only the part components that set the price. But the discussion can be focused on driving habits, cutting off the not necessary driving, drive a more fuel-efficient vehicle.

The number of topics that can be used for discussion is countless; what the author thinks really important is to keep a child interested and at the same time entertained by the conversation which will help the process of understanding. The kids’ awareness of such basic economic issues plays an essential role in how they will manage their funds in the future.

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