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.
- 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.
- Identify the curve: hot weather changes tastes for cold food, so demand increases. D shifts right from D0 to D1.
- Explain the process: at the old price P0 there is now a shortage, so sellers raise prices.
- Movement along supply: the higher price makes sellers supply more, an extension in supply.
- 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?
- Supply decreases: price rises and quantity sold falls.
- Demand decreases: price and quantity both fall.
- Supply decreases: price falls because fewer bananas are sold.