What this lesson teaches
I can work out how shifts in demand or supply change price, quantity, consumer spending and producer revenue.
Syllabus 8843, 2.1.2(f). Demand and Supply Analysis and its Applications: Changes in demand and supply can affect equilibrium price and quantity, consumer expenditure and producer revenue
Make a guess
Demand for durians rises at the same time as a poor harvest cuts supply. What can you say for certain?
- Price and quantity both rise, as more people chase the fruit.
- The price rises; the change in quantity is uncertain.
- Quantity falls; the change in price is uncertain.
Show the answer
The price rises; the change in quantity is uncertain.
Both shifts push the price up. Demand rising pushes quantity up and supply falling pushes it down, so quantity depends on which shift is bigger.
When both curves shift, one outcome is certain and the other depends on which shift is bigger.
Analyse each shift on its own first, then combine them.
If demand rises and supply falls, both push the price up. The price definitely rises. But demand rising pushes quantity up while supply falling pushes it down, so the change in quantity depends on which shift is larger.
Every pair of shifts works the same way: one outcome is certain and the other is uncertain. The table below lists all four cases.
In an exam answer, this uncertainty is useful evaluation. State which outcome is certain, then explain what the other depends on.
- Same direction for an outcome
- That outcome is certain.
- Opposite directions
- That outcome depends on the relative sizes of the shifts.
| Demand | Supply | Price | Quantity |
|---|---|---|---|
| Rises | Rises | Depends on the sizes | Rises |
| Falls | Falls | Depends on the sizes | Falls |
| Rises | Falls | Rises | Depends on the sizes |
| Falls | Rises | Falls | Depends on the sizes |
Worked example: Olive oil prices, 2023-24
Drought cut olive harvests in southern Europe. The European Commission reported the harvest was 24% below the five-year average, with depleted stocks and exceptionally high prices.
- Supply side: poor harvests cut the amount producers could offer, so supply shifted left.
- Demand side: suppose demand also rose slightly as more consumers switched to healthier oils.
- Both shifts push the price up, so the price rise is certain.
- Quantity depends on the sizes: a large harvest failure with a small demand rise means quantity falls.
Watch out for this
Demand rose and supply fell, so price and quantity both rose.
Only the price is certain to rise. Quantity could rise, fall or stay the same, depending on which shift is bigger.
Check your understanding
In December, more shoppers want air tickets to Bangkok, and airlines add extra flights. What can you say about tickets sold and their price?
- Both the price and the number of tickets sold rise.
- The price rises; the number sold may rise or fall.
- More tickets are sold; the price may rise or fall.
Show the answer
More tickets are sold; the price may rise or fall.
Right. Both shifts raise the number sold, but more demand pushes price up while more supply pushes it down.