Transcript Lemonade Stand A K through 12 Economics Experience

Lemonade Stand
A K through 12
Economics
Experience
Presented at St. Cloud State
Winter Institute
Gregory W. Stutes, Ph.D.
CoolMath
• http://www.coolmathgames.com/lemonade/index.html
– Buy cups, lemons, sugar, and ice
– Ice melts at the end of the day
– Can set price, lemons per pitcher, sugar per
pitcher, and ice per pitcher—can change price
again after you open
– Temperature and weather forecast
The Original
• http://www.virtualapple.org/J_lemonadestan
ddisk.html
• From right here in Minnesota; all others are
copies or modifications
• Multi-player
• 3 Decisions
– How many glasses to make
– How many signs to make
– What is the price
Too Simple?
• The graphics are very low-res
• The sounds are goofy at best
• Kitschy– Yes!
• But is that what we want?
Short Discussion
• What make a good simulation?
• Is too realistic too distracting?
• Do we ignore the principles when the game
has prefect sounds and lifelike images?
• Do we “play the game”?
• Pool and economics
BIG ISSUE
• These programs are in Java
• While Java is used everywhere (except Apple
products) there are potential problems
• People are always trying to hack Java
• Be sure you have the latest version!!!!
Carly Leffelman
• Former Minnesota State University Mankato
student
• Youth Transition Specialist working with
middle school and high school aged students
• Independence Inc.
The Economics of a Lemonade Stand
A Lesson on the Basic Economic
Principles behind Business
• Carly Leffelman
Introduction
•
Running a business involves very important economic components and decisionmaking skills. A business owner must understand the basics of supply and demand,
as well as how to make a profit. How does a producer know how much to produce
and sell to the consumer? How much is the consumer willing to pay for a product?
What components will either hinder or benefit a product's chances of being
purchased? Every business must take into account the different costs that they will
experience throughout the production process. Through decision-making, the
business owner will have to assign a certain amount of employees to work,
determine a set wage, and factor in the overhead that their facilities and capital
create. During the buying and selling process, different economic components
could thwart the producers ending profit. The law of diminishing returns states
that by adding more of one factor to the overall production of a product or service
will eventually lead to a decrease in output and therefore a decrease in profit. The
overhead that businesses experience can also cause a decrease in both short-term
and long-term returns. Businesses must delegate how many hours they will
operate, how many people they will employ, and how they will utilize their
resources and capital. Thus, through running a mock business, students will be
able to apply their basic understandings of economic principals to their business
venture.
Previous Knowledge Expected:
• Supply: The amount of some product which is
available to customers.
• Demand: The desire to own a product and
also having the willingness to pay.
• Profit: Difference between a firm's total
revenue and total costs.
Previous Knowledge Expected:
• Overhead: An ongoing expense that businesses
and firms experience throughout production.
• Revenue: Income that a business receives
through business activity.
• Cost: The value or price necessary to produce
something.
• Diminishing Returns: by adding more of one
factor to the overall production of a product or
service will eventually lead to a decrease in
output and therefore a decrease in profit.
Concepts:
• Supply and Demand Graph: The visual
representation of the supply and demand for
a firm's production.
Content Standards From National
Content Standards in Economics:
• From Content Standard 2:
– Effective decision making requires comparing the
additional costs of alternatives with the additional
benefits.
• From Content Standard 14:
– Entrepreneurs are people who take the risks of
organizing productive resources to make goods
and services. Profit is an important incentive that
leads entrepreneurs to accept the risks of business
failure.
Content Standards From National
Content Standards in Economics:
• Content Standard 1:
– Students will be able to use their economic
knowledge to understand the basics behind decision
making that corresponds with business.
• Content Standard 14:
– Students will be able to act as entrepreneurs through
analyzing the lemonade stand scenarios given and
calculate their final profit as lemonade stand owners.
They will also be applying a basic graph of supply and
demand to their final outcomes.
Lesson Description
• In this lesson, students will take the role as
entrepreneurs in a lemonade stand business
venture. They will work together in groups of
three to four to analyze the basic economic
components that take place in business. Each
group will be given a business scenario that
will list the following:
list the following:
• Cost of supplies
• Price
• Number of employees
– Hourly wage
• Number of customers per day
Instructions
• Each group must read through the scenario and
be able to recognize which information is
necessary for their calculations. They must
calculate their total profit for each of the ten
days.
• In the end, each group will work cooperatively to
write a short description of their lemonade
stands success or failures. Within this description
they must incorporate a basic supply and demand
graph and explain how that would work in
regards to a lemonade stand.
Day #1:
• It's sunny. You are selling it for $.10 a cup. There
is enough lemonade for 100 cups to be sold. The
ingredients necessary cost you $5.00. 87 people
stop by, but only 73 buy a glass of lemonade. You
have two people at the stand working, each
expecting 25% of your total profit for the day.
– What is your profit?
– How much do the employees receive?
– What is your total cost?
Day #2
• It's partly cloudy. You have decided to sell your
lemonade for $.15 a cup. There is enough
lemonade to sell 85 cups. The ingredients
necessary cost you $.75 because you had to buy
more ice. 79 people stop by, but only 62 people
purchase lemonade. You have 1 person at the
stand working and expects to receive 25% of the
total profit for the day.
– What is your profit?
– How much do the employees receive?
– What is your total cost?
Day #3
• It's raining today. You have decided to sell you
lemonade for $.10 a cup again. There is enough
lemonade to sell 95 cups. The ingredients cost you
$1.25 because your lemons went bad. Only 34 people
stop by, but only 25 people purchase lemonade. You
have 2 people at the stand working because no one
likes to sit in the rain alone. Each expects 25% of the
total profits for the day.
– What is your profit?
– How much do the employees receive?
– What is your total cost?
Day #4
• It's breezy and mostly sunny. You have decided to sell
your lemonade for $.20 because the rain has passed
and everyone's happy. There is enough lemonade to
sell 100 cups. The ingredients cost you $1.00 because
you needed more sugar. You have only 1 person
working the stand and they expect 25% of the day's
total profit. Out of 50 potential customers, 45 purchase
a cup of lemonade.
– What is your profit?
– How much do the employees receive?
– What is your total cost?
Day #5
• Today is a scorcher! It's 95 degrees and humid. You
have decided to sell your lemonade for $.25 a cup.
There is enough lemonade to sell 100 cups. The
ingredients cost you $1.00 because you had buy more
cups. You have 3 people working the stand because
you expect it to be very busy. Each employee expects
25% of the day's final profit. 142 customers stop, but
only 100 customers purchase because you sold out!
– What is your profit?
– How much do the employees receive?
– What is your total cost?
Day #6
• Today is cooler than the day before. It is cloudy, and a
little windy. You have decided to sell you lemonade for
$.15 a cup. There is enough lemonade to sell 65 cups.
The ingredients cost you $2.00 because you had to buy
more ice and cups after yesterday's sellout! You have 1
person working the stand and they expect 25% of the
day's total profit. Out of 56 potential customers 43 stop
and purchase lemonade.
– What is your profit?
– How much do the employees receive?
– What is your total cost?
Day #7
• Today is storming! You have decided to not
open your stand today.
– What is your profit?
– How much do the employees receive?
– What is your total cost?
Day #8
• Today is nice- a nice breeze and the sun is
shining! You have decided to sell your lemonade
for $.15 a cup. There is enough lemonade to sell
80 cups. The ingredients cost you $.50 because
you had to purchase more lemons. You have 1
person working the stand and they expect 25% of
the day's total profits. Out of 78 potential
customers, 64 stop to purchase lemonade.
– What is your profit?
– How much do the employees receive?
– What is your total cost?
Day #9
• Today is nice again. It's hot and sunny. You have
decided to sell your lemonade for $.20 a cup.
There is enough lemonade to sell 95 cups. The
ingredients cost you $1.00 because you had to
purchase more ice. You have 2 people working
the stand and they both expect 25% of the day's
total profit. Out of 90 potential customers, 89
stop by to purchase a cup of lemonade.
– What is your profit?
– How much do the employees receive?
– What is your total cost?
Day #10
• Today is HOT! You have decided to sell you lemonade
for $.25 a cup because it's your last day! There is
enough lemonade to sell 125 cups. The ingredients
cost you $1.50 because you had to get more sugar and
ice. You have 2 people working the stand because you
expect to be very busy. Each employee expects 25% of
the day's total profit. Out of 150 potential customers,
125 purchase lemonade because you sell out!
– What is your profit?
– How much do the employees receive?
– What is your total cost?
Interactive Lemonade Stand
Economics for Kids
• by Choxy
Day 1:
• Begin the lemonade unit by discussing with
students what they would need to run a
lemonade stand. What raw materials would
they need? Where should they put their
lemonade stand? Where and how should they
advertise? Have students complete this
worksheet.
Worksheet 1
___________’s Lemonade Stand
Supply Demand Consumers Producer Product Raw Materials Price
Part 1:
Use the words from the words above to complete the
sentences.
1. You are starting your own lemonade stand. This means that
you are a _____________ and the lemonade is the
_____________that you are making and selling.
2. Sugar, ice, cups and lemons are all _______________ that
you will need to make lemonade.
3. The people that buy lemonade from your stand are
called _________________.
4. The _____________ is how much lemonade that you have
available.
The _____________ is how much lemonade that people
want.
6. The _____________ of your lemonade tells consumers
how much money they will need to buy your lemonade
Day 2:
• On the second day of the lemonade activity, students
should focus on marketing their lemonade stand. Begin
the lesson by discussing the basic principles of
advertising. As a class, complete the online activity
"Create your own Ad" created by pbskids. This online
activity will allow students to help create an
advertisement for "Burp Cola" (which they think is
hysterical). They will pick the slogan, image, ad copy
and location of the advertisement. Discuss with the
students why they made the choices that they did. On
a large sheet of blank paper, have each student create
their own advertisement for their lemonade stand.
Day 3:
• I stumbled upon a great interactive lemonade
game online. There are many different lemonade
games online, but this game was more
appropriate for the age level of my students
(third grade). Allow students to play the game
while filling out this data sheet. Students will
experience how weather and price can effect the
supply and demand of their lemonade. They will
also have to set the price per cup and decide how
much lemonade to make each day. These choices
and experiences will allow them to experience
economics firsthand!
Link
• http://www.omsi.edu/exhibits/moneyville/act
ivities/lemonade/lemonadestand.htm
• A good game. Allows different levels of
difficulty through the weather. Only select
number of pitchers and the price.
Worksheet #2
_________’s Lemonade Stand
You have opened a lemonade stand and are trying to make a profit.
Complete the following chart for your first seven days of business.
DAY
WEATHER
FORECAST
# OF
PITCHERS
MADE
1
2
3
4
What was your total profit after seven days?
Did you make money or lose money?
Why do you think this happened?
PROFIT
Day 4:
• Today each student will share his/her total
profit with the class. Students who made
money will discuss why they think they were
successful and students who did not make a
profit will discuss the mistakes that they
made. A great way to end the lemonade
activity is by allowing students to drink
lemonade while discussing their business
strategies!
The Lemonade War
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by Jacqueline Davies
ISBN-13: 978-0-618-75043-6
ISBN-10: 0-618-75043-6
The following is a teachers’ guide provided by
the publisher.
About the book
The Lemonade War tells the story of an exciting summer spent by a loving but
competitive pair of siblings, Evan and Jessie Treski. At the end of the summer,
Jessie, the younger and more academically inclined of the two, is delighted to
learn that because she is skipping third grade, she will be in Evan’s fourth
grade class when school starts in a few days. To say the least, Evan is less than
thrilled. The children’s personal conflict becomes a professional one as well,
as they set out to outsell each other at their respective lemonade stands. The
arc of the narrative follows the arc of Evan and Jessie’s business endeavor,
from inception to actualization to dissolution, with all the ups and downs
along the way. Davies manages to follow this course without becoming dry or
dull—in part because the ups and downs of the Treskis’ business endeavor
are tied to the ups and downs of their relationship. The characters are lively,
realistic, and well defined, and their conflict is handled with sensitivity and
without influencing the reader to take sides. We find ourselves rooting for
both of these creative and hard-working children all the way through to the
book’s satisfying conclusion.
Special Features
• The title of each chapter in The Lemonade War is a business term or
concept, with its definition just below (for example, “Chapter 1:
Slump slump (slump) n. a drop in the activity of a business or the
economy”).
• Economic concepts are defined throughout the book as Jessie
investigates, researches, and develops her own ideas.
• Each chapter contains examples of Evan’s and Jessie’s attempts to
calculate sales, profit, expenses, etc. Readers may choose to study
the math problems in depth, working them out on their own, or
may choose to read on.
• In addition to the math problems and definitions, the book contains
some wonderful charts, diagrams, and newspaper clippings, and
even a realistic sales receipt. This lovely touch engages the reader
and fleshes out the Treskis’ story.
Guided Discussion Questions
• Have you ever felt competitive with someone you are close
to, like a sibling or a good friend? How was this embodied?
What did you do? How was it resolved?
• Evan is so angry with his sister he can barely stand it! Has
Jessie consciously done anything to harm her brother?
Explain the root of Evan’s anger.
• Jacqueline Davies chose to create Evan and Jessie as
characters that don’t fit the stereotype of boys and girls, in
terms of both their academic strengths and challenges and
their social strengths and challenges. Do you think that
these stereotypes (girls as intuitive but not good at math,
boys as good at math but not so good at reading people’s
feelings) get in the way at your school?
Guided Discussion Questions
• Even though Jessie and Evan are having a hard time with
each other, they don’t want their mom to know. Can you
explain why they are so careful not to show her they are
quarreling? Have you ever felt like this?
• Evan is pretty sure that Scott Spencer stole the lemonade
money he “borrowed” from Jessie. Why doesn’t Evan
confront Scott? Why doesn’t he ask for his money back?
• How do Evan and Jessie finally resolve the conflict—both
their lemonade war and their personal war?
• Both children have to admit that they’ve done mean things
to each other before they can move on. Have you ever
done something out of anger that you wish you hadn’t?
How did this play out?
Activities
• If your class studies The Lemonade War at the end of the school year, set
up a lemonade study in the classroom. Learning from Evan’s and Jessie’s
successes and mistakes, help your students design and implement their
own lemonade stand(s). You may choose to divide the class into groups
and have each group plan their own stand, designing posters,
advertisements, and other business schemes, as Evan and Jessie did. You
may choose to have the entire class work together on a plan. Children
might sell lemonade during recess, or even set up in the cafeteria during
lunch time. Decide together as a class how the money earned will be
spent. Taking a leaf from Jessie Treski’s book, children may want to donate
money to a charity of their choice or to school projects. They may choose
to devote a certain percentage of their profits to a culminating celebration
in school—a pizza party or lemonade party, for example!
• Using the model described above, encourage children to design and
implement a store of some kind that relates directly to your school’s
curriculum. For example, schools doing a neighborhood study may choose
to study a local grocery store and then set up a store of their own in the
classroom for a day.
Activities
• Make copies of the math problems in the book for your
students. As you read the book aloud, highlight the math
problems as a part of your students’ experience of the
book. Can they think of other ways to figure out the
problems? Are their methods more or less efficient than
Evan’s and Jessie’s methods?
• Personal conflicts like Evan and Jessie’s are often at the
core of good works of fiction. As part of a unit of study on
realistic fiction or as a separate project, have your students
design and write a story with a personal conflict at its root.
You may want to have your students write sketches of their
main characters and an outline of the plot (including
conflict and its resolutions) as part of their writing process.
Activities
• Evan and Jessie win their local Rotary Club’s annual
Labor Day contest by creating a display that details
their entrepreneurial endeavor with lemonade. Labor
Day celebrates the many achievements, both social and
economic, of the American worker. If your class is
studying The Lemonade War close to the beginning of
the school year, challenge your students to research
and present a project related to the holiday. They may
profile a particular business in your town; they may
research the history of Labor Day itself; they may
interview people in their families about their work
histories. Challenge them to find their own unique
ways to connect to the holiday.
EconEdLink
Not Your
Grandmothers
Lemonade Stand
Lesson plan provided by CEE
• http://www.econedlink.org/interactives/mul
tiple-choice/index.php?lid=276&gid=1
Activities
• Suggested online 30 day lemonade stand
game
– http://www.ae4rv.com/games/lemonade.htm
– New version of the original
• Suggested Econedlinlk activity
– http://www.econedlink.org/interactives/multiplechoice/index.php?lid=276&gid=1
•
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1) You are given $3.00 to start a lemonade
stand. You will have to buy cups for your
lemonade stand. The grocery store
charges 5 cents for each cup you buy. You
will also have to buy lemonade mix. One
container of lemonade mix costs $1.25
and makes 40 cups of lemonade. Answer
the following questions using this
information. How many cups would you
buy at a price of 5 cents a piece?
a) 25 [CORRECT]
b) 40
c) 60
2) How much would you pay for
lemonade?
a) 25 cents [CORRECT]
b) 1 dollar
c) 5 dollars
3) The demand for lemonade will _____ if
the weather is warm and sunny?
a) Increase. [CORRECT]
b) Remain the same.
c) Decrease.
•
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•
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4) If there is only enough money to make
8 cups of lemonade and there are 20
thirsty people around, the demand for the
lemonade _________ .
a) Increases. [CORRECT]
b) Remains the same.
c) Decreases.
5) an entrepreneur is a person who
________ .
a) Starts a business. [CORRECT]
b) Likes to fly planes.
c) Explores rainforests.
6) What weather would increase
lemonade demand?
a) Sunny [CORRECT]
b) Rainy
c) Snowy
7) Would you pay more for lemonade if it
was a hot day, and you were very thirsty,
and there was no place to get a drink?
a) Yes. [CORRECT]
b) No.
8) Would the price affect whether or not
you would buy the lemonade?
a) Yes. [CORRECT]
b) No.
•
9) Is this lemonade selling weather?
•
a) Yes. [CORRECT]
b) No.
10) Would setting up a lemonade stand
near a gathering of 20 people affect the
demand for the lemonade?
•
•
•
a) Yes. [CORRECT]
b) No.
11) Can these children be both consumers
and producers?
a) Yes. [CORRECT]
b) No.
12) How much money do you have left?
a) $0.75
b) $1.75 [CORRECT]
c) $2.00
13) The demand for lemonade will ______
if the weather is cold and rainy?
a) Increase.
b) Remain the same.
c) Decrease. [CORRECT]
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14) If there is only enough money to make
8 cups of lemonade and there are 4 thirsty
people around, the demand for the
lemonade _________ .
a) Increases.
b) Remains the same.
c) Decreases
15) The weather in this picture is _______
.
a) Windy and frigid.
b) Rainy and cool.
c) Sunny and warm. [CORRECT]
16) Did these entrepreneurs invest in a
luxurious lemonade stand?
a) Yes.
b) No. [CORRECT]
17) Does it look like these producers have
an unending supply for lemonade?
a) Yes.
b) No. [CORRECT]
18) Does it look like these producers in
the Norman Rockwell painting have an
unending supply of glasses?
a) Yes.
b) No. [CORRECT]
•
19) Do you have enough money to buy a container of lemonade mix?
a) Yes.
b) No.
Now that you have picked a city, you will see how much money you can make in two weeks. Each
day you should record the following information to help you answer questions later in the lesson
Day
# Made # Sold
Price Cost Weather
Per
Cup
Net
Profit
Day 1
Day 2
Day 3
Day 4
Day 5
Day 6
Day 6
Total
Cash
Assets
ASSESSMENT ACTIVITY
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•
•
•
•
•
•
•
In what circumstances did they succeed?
When did they fail? How was the profit figured?
What would they do differently?
Did they listen to the expert advice?
How did the buyers affect the price they charged?
How did their pricing affect the numbers of buyers?
What choices had to be made?
What did they gain by those choices and what did they
give up?
• What are the risks taken by the entrepreneurs?
EconEdLink
Lemon Squeeze - The Lemonade
Stand
• Everyone has at one time or another opened a
lemonade or Kool-Aid Stand. What a great place
to begin an economics lesson. Students can taste
test three brands of lemonade and compare
prices with taste – is the most expensive the
best? Using a reader’s theater students will
construct a supply and demand schedule and can
create a bar or line graph to demonstrate market
interaction between buyers and sellers.
STUDENTS WILL
• Interpret a demand schedule and observe that
consumers will buy more at lower prices and less at
higher prices.
• Interpret a supply schedule and observe that producers
supply more at higher prices and less at lower prices.
• Interpret a supply and demand schedule to determine
the market clearing price.
• Predict what will happen to demand when factors
other than price change.
• Predict what will happen to supply when there is a
change in the cost of production.
The Lemon Story
http://www.econedlink.org/interactives/EconEdLink-interactive-toolplayer.php?filename=em369_story.swf&lid=369
Lemonade Taste Test Tally
Number of Students:_________
Best
Powdered
Concentrated
Store Bought
Good
OK
Price/Serving
Readers Theater – Max's Dilemma:
A play for students to act out in class
• http://www.econedlink.org/lessons/docs_less
ons/369_readerstheater1.pdf
Lemonade Recipe:
• http://www.econedlink.org/lessons/docs_less
ons/369_recipe2.pdf
• Study the demand schedule. What does this list of
prices and amounts tell us about consumer behavior in
the marketplace? [At higher prices, consumers are
willing and able to buy less than at lower prices.]
• Study the supply schedule. What does this list of prices
and amounts tell us about producer behavior in the
marketplace? [At higher prices, producers are willing
and able to supply more than at lower prices.]
• Why is Max willing to supply more lemonade at higher
prices and less at lower prices? [Max will supply more
at higher prices because his profit is greater and
therefore, the opportunity cost of other ventures is
lower.]
• At what price should Max sell his lemonade? [30 cents
– at 30 cents the amount the group is willing and able
to buy equals the amount Max is willing and able to
supply. Tell the class this is called the market clearing
price.]
• Why is Max unwilling to sell his lemonade for 20 cents? [At that
price he only makes 2 cents profit per cup. It’s just not worth Max’s
time.]
• What will happen if Max tries to sell his lemonade at 40 cents per
cup? [At 40 cents, Max will have a surplus of 5 cups of lemonade.]
• How will each of the following situations affect the demand for
Max’s lemonade?
– The weather is cold and rainy. [Demand decreases.]
– The local senior citizens’ center surprises the group and pays them for
the yard work they volunteered to do for the center.[Demand
increases.]
– Max gives a free bag of popcorn with every glass of lemonade.
[Demand increases.]
– The YMCA sells fruit punch for 25 cents per cup. [Demand decreases.]
• How will each of the following affect the supply of lemonade at
Max’s stand?
– The supermarket has a sale on lemons. [Supply increases.]
– Max’s mom charges him for using her automatic juicer, which he uses
to squeeze the lemons. [Supply decreases.]
Lemon Puzzler: Crossword puzzle to be
filled out in the evaluation.
• http://www.econedlink.org/lessons/docs_less
ons/369_LemonPuzzler2.pdf
Sunkist Kids: Explore these pages for exciting
games and experiments.
Provide by the Sunkist Company
• http://www.sunkist.com/kids/
Advanced Lemonade Stand
• One of the problems all firms must address is
how much demand do we have for our
product
• Often small firms such as our Lemonade Stand
just select their best guess and them make
marginal adjustments
• This can provide a slow, but accurate method
to determine demand at discrete steps
How can we find a complete demand
curve?
• Cheat
– Q = 54 – 2.4*P + ((54 – 2.4*P)(1-exp(-# of signs/2))
• When P < 10
– Q = 108 – 4.8 * P + exp(-.5*signs)(2.4 * P – 54)
• When P > 10
– I looked at the original Apple Basic code
How Do Economists Estimate
Demand?
• One easy method is to graph the curve
• Another method is to use an Ordinary Least
Squares Regression to get a linear estimate of
the curve.
• Sounds scary, but if you remember the
equation of a line and if you know a bit about
Excel it is easy.
First, Collect Data
• You could, for example, assign each student a
price and ask them to find the greatest
quantity demanded at that price.
– That will be a point on the real demand curve and
we will use that info to estimate a demand curve
• The price will between ₵1 and ₵100, but 1
through 20 will be OK
Many Different Curves
• You can collect data for all demand
• Or just hot and dry days
• Zero, One or Two Ads
Let Excel Do the Difficult Part
• Key your data into excel
– Make your first column quantity
– Your second, price
• Highlight the data
• Click on the insert tab
• Click on the Scatter button
– I like the top right graph
• Boom—You are done!
Can I really do an advanced
regression?
• Yes
• Excel will do it for you
• You just need to remember some basic math
Equation of a Line
• Y = mX + b
– This is the equation must students learn in high
school math
– Y and X correspond the actual coordinates
– The slope is m
– The Y-intercept is b
How would an economist write this?
• Quantity = α + β * Price + ε
– The alpha is the Y-intercept
• But what is the Y-intercept
– It is the lowest price that you can charge and still have
everyone think the price is too high to buy even one
lemonade
– The beta is the slope
• As we said the slope will be negative—the law of
demand!!! Note: I have flipped P and Q
How would an economist write this?
– The last term is an error term.
Are all of the dots on the line. No! The up/down
distance is an error.
Error—Does that mean everything is
ruined?
• No
• This is just an estimate
• Something does not need to be perfect to be
useful
• Just look at me, I mean economics
Is it really easy to use Excel?
• Yes
– Start by opening Excel and include the add-on
with regressions
– Click on File
• Go down to Options
– In Options click on add-ins
• Near the bottom of the new screen is the word
“Manage”, a drop box, and a “Go” button
• Make sure the drop box says “Excel Add-In”
• And then hit the Go button
• After you click on Go a new pop-up will
appear.
• Check the first two boxes
– Analysis Toolpack
– Analysis Toolpack VBA
• Now you are ready for the regression
The First Scary Part is Done
• Now collect data
• You could, for example, assign each student a
price and ask them to find the greatest
quantity demanded at that price.
– That will be a point on the real demand curve and
we will use that info to estimate a demand curve
• The price will between ₵1 and ₵100, but 1
through 20 will be OK
Our First Data Problems
• Quantity = α + β * Price + ε
– This was our equation, but we can also have ads
and there is that sticky issue about weather.
• Wimpy solution
– We could use no ads and only copy data for hot
and dry days
Regression for Hot and Dry
(Prices 1-20)
How To Interpret a Regression
• The Y-intercept is the max quantity that will
be purchased. I this case the estimated value
is 107
• The slope term is approx. -5
– This means that for every cent we increase the
price we expect the quantity demanded to go
down by 5
• Does it always go down by 5. NO! This is just
an estimate
We have a Demand Curve!
• Quantity = 107.78 + -5.10 * Price + ε
• You can plug in values of P to get an estimate
of Q
Is this how they estimate
in the real world?
• They use many methods including the
regression
– Consumer Interview
• Trying to find the maximum amount
– Market Studies
• You can use the other game for a great market study!
• Hold the price fixed put change the amount of lemons
and ice.
– Experiments
• Put the consumer in the lab
And YES a regression
• They would use more than price and quantity.
• In fact, what else would they use.
• You know the answer!!!! You teach it every semester.
Other Variable
• Quantity
– Price
– Income
– Price of Comps
– Price of Subs
– Number of Buyers
– Expected Price (If possible)
– Tastes (If possible)
Can I use this info in my class?
• The math technique may be advanced, but
they know the relationship.
• Quantity = α + β * Price + β*(Income) +
β*(Price of Comp) + β*(Price of Sub) +
β*(# of Buyers) + ε
Types of Goods
• Normal vs Inferior
• Comp vs Sub
You really estimate this way?
• Well…I might add one twist. And it might
freak you out
• I might use a log-linear form
• Ln Quantity = ln α + β * ln Price +
β*ln (Income) + β*ln (Price of Comp) +
β*ln (Price of Sub) + β*ln (# of Buyers) + ε
The Hotelling Model
and
Advanced Economics
• http://ccl.northwestern.edu/netlogo/models/
community/Location%20Game
• This online game uses Netlogo to provide an
interesting extension of our game.
Lemonade StandS
• Imagine a world with more than one
lemonade stand
• The description of the online game is with two
or three restaurants in a mall. Same principle.
• Two or three stands will compete for
customers based on location. Price and
quality of lemonade is the same.
Hey! This is different!
• In our perfect competition model, we could
sell as much as we want at the market price.
• The real world is not PC. All other factors
being equal, I will not walk past a lemonade
stand to go to another stand with an equal
price and equal quality.
Where should you put your stand?
The “Root” Beer Game
• Simulates the operation of a simple supply
chain
• Illustrates important systems principles
• Developed at MIT in the 1960s
• http://www.masystem.com/o.o.i.s/1366
Playing the “Root” Beer Game
• The goal is to distribute root beer to
customers and earn the most profits for your
business. Each of you will play the role of a
manager of key distribution aspects the
company.
• Each needs to satisfy the requirements of your
immediate customer in the best possible way!
• Roles
Retailer <> Wholesaler <> Distributor <> Producer
Rules of the Game
• The supply chain partners’ only communication is by placing
orders
• All moves, inventories and backlogs are recorded on in the
computer
Playing the Game
• Each player has a starting inventory of 12
• One turn = One week of business activity
• Each “turn” in the game has 4 major steps
1. Read this week’s demand from your customer
2. Ship Root Beer to your customer in response to (1)
3. Take receipt of Root Beer from your supplier
4. Place an order with your supplier for more Root Beer
Your Cost Structure
• Inventory Carrying Cost is $1 per root beer per
week
• Cost of a Backlog is $2 per root beer per week
Sounds Easy?!?
• Demand may change and
• It takes time to deliver a shipment
Scorecard (Retailer)
Step 1 Step 2a Step 2b Step 3a Step 3b Step 3c Step 4
Starting
Ending Average
Week InventoryDemand Ship Backlog ReceiptInventory
Inventory Order
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
12
12
11
11
4
5
5
5
4
5
5
0
0
0
0
4
4
5
12
11
11
12
11.5
11
4
5
5
Cost
$ 12.00
$ 11.50
$ 11.00
Scorecard (Wholesaler)
Step 1 Step 2a Step 2b Step 3a Step 3b Step 3c Step 4
Starting
Ending Average
Week InventoryDemand Ship Backlog Receipt InventoryInventory Order
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
12
12
11
4
5
4
5
0
0
0
4
4
12
11
12
11.5
4
5
Cost
$ 12.00
$ 11.50
Scorecard (Brewery)
Step 1 Step 2a Step 2b Step 3a Step 3b Step 3c Step 4
Starting
Ending Average
Week InventoryDemand Ship Backlog ReceiptInventory
Inventory Order
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
12
11
5
5
0
0
4
11
11.5
5
Cost
$ 11.50
Bullwhip
• Focus on end-user demand through point-of-sale (POS) data
collection, electronic data interchange (EDI), and vendormanaged inventories (VMI) to reduce distortions in
downstream communication.
• Work with vendors to create smaller order increments and
reduce order batching. Order batching exacerbates demand
fluctuations.
• Maintain stable prices for products. Price fluctuations
encourage customers to over-purchase when prices are low
and cut back on orders when prices are high, leading to large
demand fluctuations.
• Allocate demand among customers based on past orders, not
present orders, to reduce hoarding behavior when shortages
occur