When it comes to teaching kids about the economy, many parents feel at a loss. Terms like “supply and demand” get tossed around but do your children really grasp what they mean?
Explaining economics basics to kids will help with their financial literacy. And the good news is it doesn’t need to be complicated. Keep reading for an easy-to-understand definition of supply and demand, the factors that affect it, and activities to teach your kids.
What is an economy?
Before you get into supply and demand definitions, you might want to be sure your child understands what an economy is. Our guide to economics for kids and teenagers might be useful in explaining it.
In simple terms, an economy is made up of people making things, people buying things, and people buying and selling things for money. How much money is moving around, where it’s going, and what’s causing it to move around is economics. And supply and demand play a key part in what causes money to move around.
A simple definition of supply
Supply is the amount of something that’s available. It could be anything from toys to milk to babysitters. In economics, supply refers to products and services people can buy.
If something is in short supply, it means there’s not much available, so it’s hard to get hold of. It’s scarce. An oversupply means the opposite. There’s plenty, if not too much, available. And not enough demand for it.
A simple definition of demand
Demand is people’s desire for something. If a product or service is in demand, it means lots of people want or need it. Low demand means few people want to buy something.
In winter, for example, there’s high demand for warm coats. In the summer, there’s less demand for them. During the holiday season, there’s a higher demand for festive wrapping paper and Christmas trees than there is in July. And there’s lower demand for pumpkins and Halloween costumes in March than there is around October 31st.
What’s the relationship between supply and demand?
The relationship between supply and demand is the relationship between what people want and how much of it is available. It drives prices in an economy.
There are four basic rules:
If demand increases and the supply stays the same, there will be a shortage. That means prices will go up.
If demand decreases and the supply stays the same, there will be a surplus. So the price will go down.
If the supply increases and demand stays the same, there will be a surplus. This means prices will go down.
If supply decreases and demand stays the same, there will be a shortage. So prices will increase.
Shops base their prices and the amount of stock they carry on supply and demand. That’s why you won’t see many winter coats in stores during the summer, or swimsuits in winter. They base their supply on how much demand from customers there will be for those items.
And that’s why shops will put winter coats on sale at lower prices in the spring. It’s to get rid of any oversupply of stock they have.
Factors that affect supply and demand
Several factors can affect supply and demand.
Demand can be affected by
- Price. As the price of a product or service goes up, the amount of demand for it tends to decrease. When the price of something goes down, on the other hand, demand may increase.
- Income. When people’s income increases, they can afford to buy more of a product or service. That will result in an increase in demand. However, when people’s income decreases, they tend to spend less, so demand may decrease.
- Market trends. Demand for something can be affected by fads or fashion. For example, a trend for healthier eating may increase the demand for organic fruits and vegetables.
- Choice. If there are other choices of a similar product available, people may switch to alternatives.
- Expectation. If buyers believe a product’s price is going up in the near future, it may increase demand. They’ll want to buy more now to avoid paying higher prices later.
Factors that affect supply include
- Price. The higher the price of a product or service, the bigger the incentive for producers to supply more of it.
- Production cost. If the cost of producing something increases, people making that product may choose to reduce supply. If something gets cheaper to make, on the other hand, then they may make more of it.
- Technology. Technological advances can mean production gets more efficient. The knock-on effect is that suppliers can produce more goods cheaper. So supply increases.
- Resources. The availability of resources, such as the raw materials to make something and the labour needed to produce it, affects how much producers can make.
- Government regulations. Government policies and laws can impact production. For example, environmental laws may increase the cost of making something. This will reduce supply.
Examples of supply and demand
Here are some examples of supply and demand to help explain it to your kids:
Mowing lawns: During summer, you might offer to mow lawns for neighbours. If there are a lot of gardens and few people offering the service, demand for your help will increase. That means you can charge more. As a result, more kids may start to offer a lawn mowing service in the area, increasing the supply.
Toys in the holiday season: During the holidays, demand for popular toys may increase, leading to an increase in price. As a result, the supply of these particular toys may increase to meet demand.
Video games: Say a popular video game is released, and there’s a high demand for it. Supplies may be limited to start with. As a result, the price of the game may be higher than usual. If demand continues, the manufacturer may produce more copies of the game to meet demand. This increase in supply may lead to a decrease in price as there are more copies available. But if there’s not so much demand for the game, the price may go down to encourage sales.
Concert tickets: When a popular band goes on tour, demand for tickets will be high. If the supply is limited initially, tickets will be scarce, with lots of people wanting to buy them. That drives the price up.
Lemonade stand: If a group of kids sets up a lemonade stand on a hot summer’s day, people will be thirstier, so demand may increase. The kids may have to make more batches of lemonade to keep up with the demand. On a cooler day, they might not have many customers. They may have lots of lemonade left over and drop the price to get rid of it.
Activities to help teach kids about supply and demand
When you think your kids have grasped the basics of supply and demand, you could suggest some games and activities to help reinforce what they’ve learned.
Market stall: younger children can set up a pretend market stall and role play acting as buyers and sellers of various goods. They can negotiate prices with each other, the goal being to buy and sell goods at a profit.
Car boot or garden sale: kids can organise a garden or car boot sale. It’ll show them how to gauge interest and price accordingly.
Stock market game: older kids can play the stock market game online or other kids' investing games. They’ll learn how supply and demand drive stock prices, learn how to invest in stocks, and track performance over time, too.
How can GoHenry help?
GoHenry is a great way to teach your kids about money. Our prepaid debit card for kids aged 6-18 comes with Money Missions, a fun, in-app education tool designed to accelerate your child’s financial literacy. Through interactive games and quizzes, they’ll learn smart money management skills from budgeting to saving, investing to economics, and more.