What this lesson teaches
I can work out how shifts in demand or supply change price, quantity, spending, revenue, consumer surplus and producer surplus.
Syllabus 9570, 2.1.2(f). Demand and Supply Analysis and its Applications: Changes in demand and supply can affect equilibrium price and quantity, consumer expenditure, producer revenue, consumer surplus and producer surplus
Make a guess
A new MRT station opens beside a food court and brings many more diners. Supply is unchanged. What happens to the price and number of meals sold?
- Both rise.
- The price falls, because more diners mean more competition.
- The price rises, but fewer meals are sold.
Show the answer
Both rise.
Demand shifts right. At the old price there is a shortage, so the price rises and stalls move up their supply curves, selling more meals.
Shift one curve, find the shortage or surplus at the old price, then show how the price adjusts.
To analyse a change, ask three questions. Which curve shifts? Which way? What happens at the old price?
Take the 2022 ban on chicken exports from Malaysia. Singapore lost part of its fresh chicken supply, so supply shifted left.
At the old price, buyers now wanted more fresh chicken than sellers could offer. The shortage pushed the price up. As it rose, some buyers switched to frozen chicken or fish, and quantity demanded fell along the demand curve.
Put these in order
Malaysia bans chicken exports and the price of fresh chicken in Singapore rises. Put the chain in order.
- The new equilibrium has a higher price and a lower quantity.
- The price of fresh chicken rises.
- The supply of fresh chicken in Singapore shifts left.
- Malaysia stops chicken exports to Singapore.
- A shortage appears at the old price.
Show the answer
- Malaysia stops chicken exports to Singapore. Less fresh chicken reaches Singapore's market at every price.
- The supply of fresh chicken in Singapore shifts left. At the old price, sellers now offer less than buyers want.
- A shortage appears at the old price. Queues and empty shelves let sellers charge more.
- The price of fresh chicken rises. Some buyers switch to frozen chicken or fish, moving up along the demand curve.
- The new equilibrium has a higher price and a lower quantity.
The new equilibrium has a higher price and a lower quantity. The four basic cases are in the table below.
- Three questions
- Which curve? Which way? What happens at the old price?
- Demand right
- Price and quantity rise.
- Supply left
- Price rises, quantity falls.
| Change | Price | Quantity |
|---|---|---|
| Demand rises | Rises | Rises |
| Demand falls | Falls | Falls |
| Supply rises | Falls | Rises |
| Supply falls | Rises | Falls |
Worked example: Cocoa costs rise for chocolate makers
Poor harvests in West Africa push up the price of cocoa, the main ingredient in chocolate.
- Cocoa is an input, so the cost of making each chocolate bar rises.
- Supply of chocolate shifts left: firms offer less at every price.
- At the old price there is a shortage, so the price of chocolate rises.
- Quantity demanded falls along the demand curve. New equilibrium: higher price, lower quantity.
Watch out for this
Chocolate became expensive, so its demand curve shifted left.
The price rise caused a movement along demand. The demand curve itself did not shift; the supply curve did.
Check your understanding
New machines cut the cost of making each notebook. Demand is unchanged. What happens?
- Price rises and quantity rises.
- Price falls and quantity falls.
- Price falls and quantity rises.
Show the answer
Price falls and quantity rises.
Right. Supply shifts right, creating a surplus at the old price, so the price falls and more notebooks are bought.