Lesson 1

Lesson Topic : Prices – Why do goods cost what they do?

Goal : Have students start to think about why certain things cost what they do. Introduction to cost pricing.

Lesson Overview:

1. Class discussion – What do they know about prices? Why do goods cost what they do? List common items and estimate the price.

2. Lecture/Background info – History of production

3. Video – Middle School Money Matters Video 8 – 1 : Cost Pricing – one method of pricing goods for sale

4. In-class activity: Pick items from the list of goods made at the beginning of class and estimate what the production costs are.

5. Wrap-up discussion or Extension activity

Class Discussion / Questions:

Write some examples of common goods that people buy on the board (milk, apples, TV, cell phone, new car… whatever you can think of that your students can relate to or have the students come up with the list, around 20 items). Ask students to estimate the prices of the items you have listed. Ask what they have based their estimates on?

• Why do goods cost what they do?

• What are the costs involved with bringing goods to your home? See what students can come up with as a list of things that impact the cost of the goods we buy.

If they need prompts, here is a list of the main things that affect product pricing: Labour, materials, capital investment like machines, factories and land. The cost of distribution/transportation/delivery and administration as well as profit and margins.. And Taxes! All have to be considered when pricing an item for sale. Knowing this, ask students why they think so much of the world’s factory production happens in countries like China, Bangladesh, India etc… - Because the labour cost is much cheaper and the savings on discount labour far exceeds the extra cost of shipping.

**What about luxury items or fashionable items though? Some people are willing to pay much more than the cost of production for some items because of exclusivity, items like high fashion, art, custom design. So in this case pricing comes down to what people are willing to pay, more than what the actual cost of production was.

Background Information/Lecture

This lesson can really begin with an overview of the industrial revolution, what that was and how it impacted the world economy. Check YouTube for some good examples on the subject. Then the transportation revolution beginning with the steam engine and trains giving way to highways and semi-trucks, then ocean liners moving into freighters, and air travel and shipping becoming cheaper and cheaper to the point where these days people can buy cut flowers from South America and Europe; fruit can be bought year round because of the difference in seasons in the North and Southern hemispheres. All of this has really occurred in the last 200 years of history and it has led to a massive explosion in population and worldwide trade (look up and show a graph of the world population over the last 200 years and a graph of world production and consumption). This has allowed companies to look worldwide for materials and labour sourcing the best prices to keep production costs down which has allowed consumers to buy and buy and buy. This could lead into a huge cross-curricular discussion about all the negative aspects of human ‘progress’ such as climate change, deforestation, resource extraction, extinction of species, fossil fuels etc…But let’s get back to our topic, why goods cost what they do.

Let’s look at a typical example of producing a 50 inch flat-screen television that retails in a store for $400. The overall materials cost is somewhere around $150 including all packaging and everything, the labour assembly cost is around $75, shipping $25. Then there are the fixed costs of running the factory and land/lease payments/ advertising/ taxes. These costs are spread out over the entire production run of TVs so are perhaps $50 per unit. The company then sells the TV to a retailer for $325 and makes $25 profit on each unit. The retailer then sells them for $400 making $75 per TV sold, but in reality the retailer is taking on the cost of defective units and replacing them when needed and has their own fixed costs so the retailer may only be making $25-50 in profit in the end. This is just an example and these numbers are generalizations.

Video – MSMM #8-1 Pricing Goods, why do things cost what they do?

Key Video Points

• Production costs such as raw materials, labour and capital costs

• Transportation, distribution

• Taxes and import duties

• Profit

Activity/In-class work

Split students up into groups and have them pick 3 or 4 items and do some online research to see if they can determine what the approximate cost of production is for those items. List the costs from largest to smallest including Labour, Materials, Shipping, Capital costs/Investments, Profit. Can they find certain items that seem to have a higher profit margin? How are these items different than those with lower profit margins?

Groups can share out what they discovered about the cost of production of one of their items. This can lead into a further class discussion about items that are high volume/low margin (Like TVs) vs. items that are low volume/high margin (like luxury yachts).

Wrap-up/Extension Activity

1) Further Research – What are considered ‘High margin/Low volume’ Businesses vs. ‘low margin/high volume’ and what do those terms mean. If you were going to start a business what type would you prefer, why?

2) Pick an item like cars, or electronics or a food item and look up the price over time. Has the price stayed the same or changed? Has it gone up or down? Do you think inflation is the only cause for the price change? What else could have affected the price? (hint: prices of raw materials as they become scarcer, economies of scale occur when items are produced in higher volumes which can drive the price down (again the example of flat-screen TVs which have dropped considerably in price since they came out, also lower production costs by moving production overseas…)