What this lesson teaches
I can show that a change in a good's own price moves along its demand or supply curve.
Syllabus 9570, 2.1.2(c). Demand and Supply Analysis and its Applications: Changes in price of the good/service itself cause a movement along the demand/supply curve
Make a guess
A bubble tea shop cuts its price and sells many more cups. Nothing else changes. Did demand for its bubble tea rise?
- No. Quantity demanded rose, moving along the same curve.
- Yes. The price cut shifted the demand curve right.
- No. Demand fell, because the shop now earns less on each cup.
Show the answer
No. Quantity demanded rose, moving along the same curve.
Only the good's own price changed. That moves buyers along the demand curve. Demand itself, the whole curve, did not shift.
A change in the good's own price moves along the curve; anything else shifts it.
If the price of the good itself changes, buyers move along the existing demand curve. We call this a change in quantity demanded.
If something else changes, such as income, tastes or the price of a related good, the whole curve shifts. We call this a change in demand.
The same rule applies to supply. A change in the good's own price moves along the supply curve. A change in costs or technology shifts it.
In an exam, the words matter. "Demand rises" means the curve shifts right. "Quantity demanded rises" means a movement along the curve.
Sort these
Sort each event for the market for coffee in Singapore. Does it move buyers along the demand curve, or shift the curve?
Groups: A movement along the demand curve, A shift of the demand curve.
- A coffee chain runs a half-price promotion on its coffee.
- The price of tea, a substitute, rises sharply.
- Household incomes in Singapore rise.
- A study linking coffee to better health goes viral.
- The price of coffee falls after a good harvest abroad.
- Cafes raise the price of a cup of coffee.
Show the answer
A movement along the demand curve
- A coffee chain runs a half-price promotion on its coffee. A cut in the coffee's own price changes quantity demanded, not demand.
- The price of coffee falls after a good harvest abroad. The cause is on the supply side; buyers react to the lower price by moving along demand.
- Cafes raise the price of a cup of coffee. This is the good's own price, so buyers move along the existing curve.
A shift of the demand curve
- The price of tea, a substitute, rises sharply. A related good's price changed, so some tea drinkers switch and demand for coffee shifts right.
- Household incomes in Singapore rise. Income is not the good's own price; for a normal good, demand shifts right.
- A study linking coffee to better health goes viral. Tastes changed, so buyers want more coffee at every price.
- Own price changes
- Movement along the curve: quantity demanded or supplied changes.
- Anything else changes
- The curve shifts: demand or supply changes.
- Exam wording
- 'Demand rises' means a shift; 'quantity demanded rises' means a movement.
Worked example: Tea becomes dearer. What happens to coffee?
Many people treat tea and coffee as substitutes. The price of tea rises.
- For tea: its own price changed, so there is a movement up the tea demand curve. Quantity demanded of tea falls.
- For coffee: its own price has not changed, but a related good's price has. Some tea drinkers switch, so demand for coffee rises.
- The coffee demand curve shifts right, pushing up the price and quantity of coffee.
Watch out for this
Coffee sales rose, so the supply of coffee must have increased.
Sales can rise because demand shifted right, with supply unchanged. Find the cause before deciding which curve moved.
Check your understanding
A sandwich shop cuts its price and sells more. In the same week, a new office block opens next door. Which change shifts the shop's demand curve?
- The price cut, because the shop now sells more sandwiches than it did before.
- Both changes, because each one raises the number of sandwiches the shop sells.
- The new office block, because more buyers now want sandwiches at each price.
Show the answer
The new office block, because more buyers now want sandwiches at each price.
Right. A new group of buyers raises demand at every price, so the curve shifts right. The price cut only moves the shop along its curve.