Lemonade Stand Economics Lesson

By Napoleon Dynamite

 

In a small neighborhood in Southern California there are many young boys and girls that love to play in the warm summers.  The weather gets quite hot in July and August, with temperatures on some days reaching the high 90’s and even over 100 degrees.  Most of the children living in this neighborhood are in elementary school or middle school and do little but think about swimming, playing sports, or having fun over the summer because none of them have to be in school.  However, there were two young kids that were slightly different from the rest.  Little Jake, who was 10 years old and loved to play baseball, had an entrepreneur gene in him and chose to use his summer differently than his friends.  Then there was sweet little Lauren, who was one year older than Jake, but had a similar personality and had other plans for her summer than playing jump scotch and jacks. 

As I had mentioned, Jake was interested in baseball, but was also athletic and interested in other sports.  He really wanted a new bike, but his parents said that he was going to have to help pay for it.  Jake got an allowance each week, but it was small and would not be nearly enough so he had to come up with another way to get money.  Lauren was in a similar situation, she wanted to get a special, limited edition doll, but needed to raise some money on her own.  Both of them, separately, had an idea of how they could make money over the summer.  Knowing that there was going to be warm weather all summer and that their kid neighbors would be outside playing most of the day, they knew there was one product that they could sell to quench their friends’ thirst, lemonade. 

Jake and Lauren, not aware of the other’s plans, decided to set up lemonade stands in the neighborhood.  Both of their parents were very impressed with their children’s ideas and decided to supply the stands and supplies for them, which meant that all revenues were profits.  Jake began selling his lemonade for $.50 a cup, while Lauren came into the market selling her lemonade for $.75 a cup.  Both were making money, but because Jake’s prices were lower he was earning more money.  Lauren still had customers because she had friends that would buy her lemonade no matter what.  But a great deal of the market share was held by Jake.  Knowing that she would have to make more money if she was going to buy her doll, Lauren decided to slowly drop her prices.  Jake also decided to slowly raise his prices believing that as long as he was still selling his lemonade at a lower price than Lauren he would continue to keep a stronger market share and he might as well make more money. 

This went on for a little while but then Jake and Lauren both realized something.  They both kept track of their sales and earnings and found that there was a specific quantity of cups sold each day at a certain price that resulted in the highest total profits.  They found out that if they sold each cup of lemonade for $.60 that the demand was 30 cups.  Both owners knew that this meant they could each sell 15 cups a day for $.60 and make $9 of profit every day.  If either child decided to lower their prices, they would be able to make more money for themselves because of higher sales.  But then the other child would lower their prices as well and both would make less money.  As long as the two colluded, they could both maximize profits and in the end earn enough money to buy the toys they wanted.  Jake was able to get the bike he wanted and Lauren was able to get the special doll she wanted, but both were able to get an unexpected lesson in economics and business that would help them later in life.