Causes and consequences of price changes

G3 Economics - syllabus K343, 2027

What this lesson teaches

  • I can explain how changes in demand and supply cause prices to change.

    Syllabus K343, 2.5.1. Causes of price changes: how price changes are caused by changes in demand and supply

  • I can use demand and supply diagrams to show how a price change affects sales.

    Syllabus K343, 2.5.2. Consequences of price changes: effect of price changes on sales; use of demand and supply diagrams to illustrate the impact of changes in market conditions

Make a guess

Doctors warn that a popular snack is unhealthy, and many buyers stop eating it. What happens to its price and the amount sold?

  1. The price rises, because the snack is now rare.
  2. Both fall.
  3. The price falls, but more is sold.
Show the answer

Both fall.

Demand decreases, so at the old price there is a surplus. Sellers cut prices, and quantity supplied contracts.

Shifts in demand or supply change the equilibrium price, which changes how much is bought and sold.

Equilibrium price changes when demand or supply shifts. To explain any price change, start from equilibrium, shift one curve, describe the shortage or surplus at the old price, then state the new equilibrium.

An increase in demand raises both price and quantity. A decrease in demand lowers both. An increase in supply lowers price and raises quantity. A decrease in supply raises price and lowers quantity.

Price changes affect sales. When price rises because demand increased, sales rise too. When price rises because supply decreased, sales fall. So always say which curve moved.

If both curves shift, one of price or quantity is certain and the other depends on which shift is bigger.

Put these in order

Hot weather makes ice cream more popular. Put the chain to the new equilibrium in order.

  • Quantity supplied extends until a new equilibrium is reached.
  • The price of ice cream rises.
  • A shortage appears at the old price.
  • Hot weather makes people want more ice cream.
  • Demand for ice cream shifts right.
Show the answer
  1. Hot weather makes people want more ice cream. Tastes change for a non-price reason, so the whole demand curve moves.
  2. Demand for ice cream shifts right. At the old price, buyers now want more than sellers offer.
  3. A shortage appears at the old price. Queues and empty freezers let sellers raise prices.
  4. The price of ice cream rises. Higher prices make selling ice cream more profitable, so sellers offer more.
  5. Quantity supplied extends until a new equilibrium is reached.
Demand increases
Price rises, quantity rises.
Supply increases
Price falls, quantity rises.
Supply decreases
Price rises, quantity falls.
Method
Shift, shortage or surplus at old price, new equilibrium.

Worked example: Writing up a demand shift

A question asks you to explain the effect of a heatwave on the market for ice cream.

  1. Identify the curve: hot weather changes tastes for cold food, so demand increases. D shifts right from D0 to D1.
  2. Explain the process: at the old price P0 there is now a shortage, so sellers raise prices.
  3. Movement along supply: the higher price makes sellers supply more, an extension in supply.
  4. Result: new equilibrium at E1, with a higher price P1 and higher sales Q1.

Watch out for this

Higher prices always mean firms sell less.

It depends on which curve moved. If demand increased, both price and sales rise. Sales fall only when the price rise comes from a decrease in supply, or when the firm raises price on its own.

Check your understanding

A disease destroys many banana farms. What happens in the market for bananas?

  1. Demand decreases: price and quantity both fall.
  2. Supply decreases: price falls because fewer bananas are sold.
  3. Supply decreases: price rises and quantity sold falls.
Show the answer

Supply decreases: price rises and quantity sold falls.

Right. S shifts left, creating a shortage at the old price, which pushes the price up.

Check your understanding

In a market, demand increases and supply decreases at the same time. What must happen to the equilibrium?

  1. Price and quantity both rise
  2. Price falls and quantity rises
  3. Price rises; the change in quantity is uncertain
  4. Quantity falls; the change in price is uncertain
Show the answer

Price rises; the change in quantity is uncertain

Right. Both changes push price up, but they pull quantity in opposite directions.

The Wise Otter

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