2.5. Price changes
- Syllabus
- 0455–2027–2028
- Topic
- 2.5
- Level
- —
Learning objectives
Explain why equilibrium price changes
A market's equilibrium price changes when a non-price condition shifts demand or supply. At the old price, the shift creates a shortage or surplus; price then adjusts until quantity demanded again equals quantity supplied.
| Market change, other conditions unchanged | Old-price imbalance | New equilibrium price | New equilibrium quantity |
|---|---|---|---|
| demand increases (right shift) | shortage | rises | rises |
| demand decreases (left shift) | surplus | falls | falls |
| supply increases (right shift) | surplus | falls | rises |
| supply decreases (left shift) | shortage | rises | falls |
To analyse a cause, first decide which curve shifts and in which direction. Keep the other curve fixed, mark the original intersection E1, draw the shifted curve, then read the new intersection E2. Compare both the price and quantity coordinates.
If demand for a product falls while its supply increases, both changes push the equilibrium price down. If demand rises while supply falls, both push the equilibrium price up. When the shifts push price in opposite directions, the price outcome depends on the relative size of the shifts.
Do not treat a change in the product's own price as the original cause of a curve shift. Own-price adjustment is movement along demand and supply curves; the initial change here is a non-price determinant such as income, preferences, costs, productivity or weather.
Read price changes and sales from a diagram
A demand-and-supply diagram shows two consequences of changed market conditions: the new equilibrium price and the new equilibrium quantity traded. That equilibrium quantity is the market's sales volume.
| Shift pattern | Price result | Sales / quantity traded result |
|---|---|---|
| demand alone shifts right / left | rises / falls | rises / falls |
| supply alone shifts right / left | falls / rises | rises / falls |
| demand and supply both increase | uncertain | rises |
| demand and supply both decrease | uncertain | falls |
| demand rises while supply falls | rises | uncertain |
| demand falls while supply rises | falls | uncertain |
Draw price on the vertical axis and quantity on the horizontal axis. Label the original curves D1 and S1 and their intersection E1. Shift only the curve or curves changed by the stated market conditions, label the new intersection E2, and project E1 and E2 to both axes. The coordinate comparisons, not the visual height alone, give the price and sales effects.
Suppose preferences shift towards solar energy while supply is unchanged. Demand shifts right from D1 to D2, so both equilibrium price and sales rise. If production technology instead improves while demand is unchanged, supply shifts right: price falls but sales rise.
A higher market price does not always mean higher sales: a decrease in supply raises price but lowers quantity traded. Nor can price alone determine firms' total revenue, because revenue depends on both price and quantity; responsiveness and revenue are developed in the later elasticity Topic.