Price changes

Economics · The allocation of resources. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

The equilibrium price changes only when the demand curve or the supply curve shifts. To answer any question, follow the same steps: decide which curve is affected, decide whether it shifts right or left, then read off the new price and quantity.

A shift in demand moves price and quantity in the same direction. More demand means a higher price and more sold; less demand means a lower price and less sold. A shift in supply moves them in opposite directions. More supply means a lower price and more sold; less supply means a higher price and less sold.

When one curve shifts, there is a movement along the other curve to the new equilibrium.

Rules to remember

Demand increases (shifts right): price rises, quantity rises
Demand decreases (shifts left): price falls, quantity falls
Supply increases (shifts right): price falls, quantity rises
Supply decreases (shifts left): price rises, quantity falls
If both curves shift, one result is certain and the other depends on the size of each shift
A higher price with nothing else changed means lower sales, because demand contracts
Percentage change = (change ÷ original value) × 100

Common mistake

When supply falls and price rises, students say that demand decreases. The demand curve has not moved; demand contracts along the existing curve.

Worked example

Floods destroy part of the tomato crop. In the same month a festival makes more people want tomatoes. What happens to the equilibrium price and quantity of tomatoes?

The floods decrease supply: the supply curve shifts left, which raises price and lowers quantity.
The festival increases demand: the demand curve shifts right, which raises price and raises quantity.
Both changes raise the price, so the price must rise.
The two changes pull quantity in opposite directions, so the result depends on which shift is larger.

Answer: The price rises; the change in quantity is uncertain.

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