Price changes Revision Notes

Prices in a market are primarily determined by the interaction of supply and demand. When demand for a good or service increases while supply remains unchanged, there is upward pressure on prices because more buyers compete for the same quantity. For example, if a new smartphone model becomes popular, demand rises, and if the number of phones available does not increase immediately, prices tend to rise.

Conversely, if supply increases without a matching rise in demand, prices usually fall. For instance, if a farmer produces a larger harvest of wheat than usual but demand stays constant, the surplus supply can push prices down. Understanding these basic shifts helps explain many price changes in real markets.

• Increase in demand with constant supply → price rises.
• Increase in supply with constant demand → price falls.

Consumer tastes and preferences can change due to trends, advertising, or changes in income, affecting demand and thus prices. For example, if consumers suddenly prefer electric cars over petrol cars, demand for electric cars rises, pushing their prices up if supply does not keep pace.

Similarly, if a product falls out of favour, demand decreases, leading to lower prices. These preference shifts can be sudden or gradual but are important in explaining price fluctuations beyond simple supply and demand changes.

• Changing tastes can increase or decrease demand.
• Demand shifts influence prices accordingly.

The cost of producing goods affects how much suppliers are willing to produce at different prices. If production costs rise, such as due to higher raw material prices or wages, suppliers may reduce output or increase prices to maintain profitability.

For example, if oil prices rise sharply, the cost of producing plastic goods increases, which can reduce supply or raise prices for those goods. Conversely, technological improvements that lower production costs can increase supply and reduce prices.

• Higher production costs can reduce supply or increase prices.
• Lower production costs can increase supply and reduce prices.

Prices can also be influenced by broader economic conditions such as government policies, taxes, subsidies, or global events. For instance, an increase in taxes on cigarettes raises costs for producers and often leads to higher prices for consumers.

Similarly, a natural disaster disrupting supply chains can reduce supply and increase prices. Exchange rate fluctuations can affect import prices, influencing domestic prices of imported goods. These external factors can cause price changes independent of immediate supply and demand shifts.

• Government taxes or subsidies affect prices.
• Global events can disrupt supply and change prices.
• Exchange rates influence import prices and domestic prices.

In a market, the price of a good or service influences how much consumers want to buy (quantity demanded) and how much producers want to sell (quantity supplied). When the price changes, there is a movement along the existing demand and supply curves rather than a shift of the curves themselves.

For example, if the price of apples falls from $2 to $1.50 per kilogram, consumers will generally want to buy more apples because they are cheaper, causing an extension along the demand curve. Simultaneously, producers may supply fewer apples at the lower price, causing a contraction along the supply curve. These movements reflect the law of demand and the law of supply.

• Price changes cause movements along demand and supply curves, not shifts of the curves.
• A price decrease leads to an extension of demand and a contraction of supply.
• A price increase leads to a contraction of demand and an extension of supply.

When the price is set above the equilibrium price, the quantity supplied exceeds the quantity demanded, creating a surplus. Producers have unsold stock, which puts downward pressure on the price.

Conversely, if the price is below equilibrium, the quantity demanded exceeds quantity supplied, causing a shortage. Consumers compete to buy the limited supply, pushing the price up.

For example, if the price of concert tickets is set too high, many tickets remain unsold (surplus). If the price is too low, more people want tickets than are available (shortage).

• Surplus occurs when price > equilibrium price, supply > demand.
• Shortage occurs when price < equilibrium price, demand > supply.
• Surpluses cause prices to fall; shortages cause prices to rise.

The market naturally moves towards equilibrium where quantity demanded equals quantity supplied. Price changes trigger adjustments: surpluses cause prices to fall, increasing quantity demanded and decreasing quantity supplied until equilibrium is restored.

Similarly, shortages cause prices to rise, decreasing quantity demanded and increasing quantity supplied until the market clears.

For example, if a new smartphone model is overpriced, unsold units accumulate, prompting sellers to reduce prices until sales match supply.

• Price adjusts to eliminate surplus or shortage.
• Equilibrium price is where demand and supply curves intersect.
• Equilibrium quantity is the quantity bought and sold at equilibrium price.

A demand and supply diagram has price on the vertical axis and quantity on the horizontal axis. The downward-sloping demand curve shows the inverse relationship between price and quantity demanded. The upward-sloping supply curve shows the direct relationship between price and quantity supplied.

When price changes, movements occur along these curves. Surpluses and shortages are shown as horizontal gaps between supply and demand at a given price.

To illustrate adjustment, draw arrows showing price moving towards equilibrium where the two curves intersect. Label the initial and new equilibrium points clearly.

• Label axes: Price (vertical), Quantity (horizontal).
• Demand curve slopes downwards; supply curve slopes upwards.
• Equilibrium is at the intersection of demand and supply curves.
• Show movements along curves for price changes, not shifts.

Suppose the price of coffee rises from $3 to $4 per cup. At $4, fewer customers buy coffee (quantity demanded falls), but coffee shops are willing to supply more (quantity supplied rises), creating a surplus.

Coffee shops may lower prices to attract more customers, moving price back towards equilibrium, say $3.50, where quantity demanded equals quantity supplied.

This example demonstrates how price changes cause movements along curves, leading to surpluses or shortages and eventual market adjustment.

• Price increase → quantity demanded decreases, quantity supplied increases.
• Surplus at higher price leads to price reduction.
• New equilibrium price and quantity restore market balance.