Teachers have the ability to influence a child's sense of belonging and peer relationships in the classroom which are important for a child's social development. Currently, little is known about the ways in which they do this. Vygotsky's concept of the social situation of development and Hedegaard's model for learning and development were used to discuss the conditions teachers created that promote peer relationships within the classroom. Digital video observations and interview of one grade 1 classroom teacher from the western suburbs of Melbourne, Victoria were analysed using Hedegaard's dialectical-interactive approach. This paper demonstrates how the societal demands on institutions influence the activity settings that students participate in and argues that teachers need to create conditions for peer interactions that satisfy societal needs as well as being meaningful for their students and their social situation of development.