How Prices are Determined in a Market Economy – Hybrid Cars

Subject: How Prices are Determined in a Market Economy – Hybrid Cars
Targeted Learners: This project is targeted for visual and kinesthetic learners.
Learning Objectives:
Define the law of demand and explain the substitution effect.
Demonstrate, with the use of graphs, the law of demand, elasticity of demand and changes in demand.
Define the law of supply and the profit motive.
Demonstrate, with the use of graphs, the law of supply, elasticity of supply and changes in supply.
Explain the role of prices in the American economy.
Demonstrate, with the use of graphs, how the interaction of supply and demand result in an equilibrium
market prices and how changes in supply and demand effect equilibrium price and quantity.
Correlation to California Content Standards – Principles of Economics:
12.2 Students analyze the elements of America’s market economy in a global setting.
12.2.1 – Understand the relationship of the concept of incentives to the law of supply and the
relationship of the concept of incentives and substitutes to the law of demand.
12.2.2 – Discuss the effects of changes in supply and/ or demand on the relative scarcity, price, and
quantity of particular products.
12.2.4 – Explain how prices reflect the relative scarcity of goods and services and perform the allocative
function in a market economy.
12.2.5 – Understand the process by which competition among buyers and sellers determines market
12.2.6 – Analyze how domestic and international competition in a market economy effects goods and
services produced and the quality, quantity and price of those products.


Correlation to National Council on Economic Education Standards:

Standard 7 – Markets exist when buyers and sellers interact. This interaction determines market prices
and thereby allocates scarce goods and services.
Standard 8 – Prices send signals and provide incentives to buyers and sellers. When supply or demand
changes, market prices adjust, affecting incentives.
Standard 9 – Competition among sellers lowers costs and prices, and encourages producers to produce
more of what consumers are willing and able to buy. Competition among buyers increases prices and
allocates goods and services to those people who are willing and able to pay the most for them.


The price of gas has just reached $2.30 per gallon in your town, and your father has decided it’s time to
trade in the gas guzzling SUV for one of the new hybrid gas/electric cars. You and he did some research
about car prices online, and you were pretty certain the family could get what it wanted for a little
under $20,000.
How Hybrids Work
How Hybrids Work – Source: CNET
Wow, were you wrong. The first dealer you went to had four hybrid cars on the lot, with a marked up
sticker price of $25,000. He laughed at your father when he offered $20,000. The second dealer was
taking orders for the hybrid car at a price of $26,500. He said there was a three month wait for delivery.
Your thirteen year old brother was with you when you visited the dealer, and he doesn’t understand
why prices for these cars are so high.
You have just completed National University’s Virtual High School economics course, and you are quite
knowledgeable about how prices are determined in a market economy, so you try to explain to your
brother all about demand, supply and equilibrium. Not surprisingly, your brother doesn’t have a clue
about what you are saying.
At the dinner table last night, your mother came up with a great suggestion. She said you could create a
storybook, designed for middle school students, which would explain in basic terms how prices are
determined in a market economy. She said she would use it in her seventh grade class (she’s a teacher),
and if it was successful, she would talk to a friend of hers who publishes children’s books. In fact, she
hinted that you might even be able to make a good profit from such a book. You laughed at her
suggestion, but since you are just about broke, what with saving up for some of your college expenses,
the idea of making some money, and creating an educational aid for kids like your brother, now seems
like a good idea.


Your Task:
Produce a booklet aimed at a middle school audience, which explains how prices are determined in a
market economy, and how various events and circumstances can cause those prices to change. You are
to do this in a storybook format, using hybrid cars as your theme. At a minimum, your book must devote
at least one page to each of the following concepts:
The law of demand and the reason(s) for it.
Elasticity of demand and how it effects price changes.
Three (or more) reasons why and in which direction demand curves shift.
The law of demand and the reason(s) for it.
Elasticity of supply and how it effects price changes.
Three (or more) reasons why and in which direction supply curves shift.
How equilibrium is achieved and what it means.
Effects on equilibrium price and quantity when the demand and/or supply curve shifts. Be sure to
identify and explain shortages and surpluses.
You must use graphs to go along with any write-up. Your book should be colorful, easy to read, wellorganized, age-appropriate and accurate. Use a glossary for terms that might be too advanced for
middle school students. Import graphics from any source you want, or create your own.

The Process:
• Research – Before you start your book, you should review the material from the text on
demand, supply, and equilibrium. Then, visit the Explorations in Demand and Supply website
hosted by the University of Nebraska at Omaha for additional information. Read the material
very carefully and go to the various links provided and take the self-tests. You will find
discussion questions on the Explorations in Demand and Explorations in Supply pages.
Answering these questions will be part of your assignment.
• Timetable – Create a timetable and list of activities. This will detail the various steps you will
need to complete in finishing your project.
• Outline – Create an outline for your book.
• Write the Book – Then, prepare your book. Content of your book must reflect principles of
demand, supply, and equilibrium that you have learned during this course, along with any
additional insight you may draw from other sources. Use any search engine to look up
information about the demand, supply and prices of hybrid cars. Be sure to prepare a list of
sources you used in the preparation of your book.
• Culminating Essay – After you have completed your research and your book, write a welldeveloped essay (1-2 pages) in which you explain how the principles you have learned in this
course and your research apply to hybrid cars. Explain which curves have shifted – demand,
supply, or both – and why. Explain the impact of changes in the determinants of supply and
demand, e.g. the price of gas. Finally, predict what will happen to the demand, supply and the
price of hybrid cars over the next few years.

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