Explain how a change in demand or supply affects price and quantity.
Identify why buyers or sellers change their behaviour at a given price. Shift that curve, then compare demand and supply at the old equilibrium price. Explain the resulting price pressure and movements along the curves. With the usual slopes: demand right raises price and quantity; demand left lowers both; supply right lowers price and raises quantity; supply left raises price and lowers quantity.
- Cause
- Explain what changes buyers' or sellers' behaviour at a given price.
- Curve
- Shift the affected curve. Check for a shortage or surplus at the old price.
- Adjustment
- Explain why price changes and how quantities respond until a new equilibrium is reached.
| Change | Held unchanged | Equilibrium price | Equilibrium quantity |
|---|---|---|---|
| Demand increases (right) | Supply | Rises | Rises |
| Demand decreases (left) | Supply | Falls | Falls |
| Supply increases (right) | Demand | Falls | Rises |
| Supply decreases (left) | Demand | Rises | Falls |
Worked example: Cocoa costs rise for chocolate makers
Cocoa becomes more expensive, raising the cost of making chocolate bars. Chocolate buyers' tastes, incomes and other demand determinants stay unchanged.
- Higher input costs make sellers willing and able to supply fewer chocolate bars at each price: supply shifts left.
- At the old equilibrium price, quantity demanded now exceeds quantity supplied, creating a shortage.
- Upward price pressure causes buyers to reduce quantity demanded while producers extend quantity supplied along the new supply curve.
- The new equilibrium has a higher chocolate price and fewer bars traded than before. Demand has not shifted.
Watch out for this
Chocolate becomes expensive, so its demand curve shifts left.
The higher chocolate price causes a contraction in quantity demanded along demand. The initial cause was a rise in cocoa costs, which shifted chocolate supply.
Check your understanding
Better production technology lowers the cost of making each notebook. Notebook demand is unchanged. What does the model predict?
- Demand shifts right, raising price and quantity.
- Supply shifts right, lowering price and raising equilibrium quantity.
- Supply shifts left, raising price and lowering equilibrium quantity.