Ask: did this good's own price change?
A change in the good's own price causes movement along its existing curve: quantity demanded or supplied changes. A different determinant changes the curve itself. Demand can shift with tastes, income, buyer numbers or the price of a related good. Supply can shift with input costs, technology or seller numbers. Keep the market fixed while deciding which price is the own price.
- Own price
- The price of the good shown on your diagram. In the coffee market, coffee's price is the own price; tea's price is another good's price.
- Movement along a curve
- When only the own price changes, buyers or sellers choose another quantity on the existing curve. The whole demand or supply relationship has not changed.
- A curve shift
- A determinant is a factor affecting demand or supply, such as income or production costs. If another determinant changes, the curve can shift: right means more at the same price; left means less.
- Related goods
- Substitutes are alternatives, such as tea and coffee for some buyers. Complements are used together, such as printers and compatible ink. A change in the related good's price can shift demand for this good.
Worked example: Tea becomes dearer. What happens to coffee?
Consumers treat tea and coffee as substitutes: drinks they can choose in place of one another. Tea becomes more expensive. Coffee production costs and other demand factors are unchanged.
- Analyse the coffee market. The price that changed is tea's, not coffee's own price.
- Some buyers switch towards coffee, so they want more coffee at each given coffee price.
- Coffee demand shifts right. Coffee supply has not shifted: no supply determinant changed.
- As coffee's equilibrium price subsequently rises, producers increase quantity supplied along the unchanged supply curve.
Watch out for this
Coffee sales rise, so coffee supply must have increased.
More sales do not identify which curve shifted. Here, higher demand raises price and encourages movement along supply. An increase in supply means more offered at each given price.
Check your understanding
A seller lowers a product's own price. Buyers' incomes, tastes and other demand determinants stay unchanged. How do you describe their response?
- An increase in demand: the demand curve shifts right.
- A decrease in quantity demanded along the same curve.
- An increase in quantity demanded along the same demand curve.