0455 · 2.5Price changes

Demand, supply and equilibrium

0:00A poor tomato harvest can raise prices while reducing sales. When reusable bottles become fashionable, their price can also rise, yet more bottles are sold. The same direction of price change can therefore produce different outcomes for sales. By the end of this video, you will understand why the cause matters. This video shows how price changes are caused by changes in demand and supply. Then we will follow how buyers and sellers respond as the market reaches a new equilibrium.

0:25Four diagrams will show the main possibilities. When we discuss the effect of price changes on sales, sales means the quantity sold, not the money sellers receive. Demand is the willingness and ability of consumers to buy a product at each price over a given time period. For producers, the matching idea is supply: their willingness and ability to sell a product at each price. Equilibrium occurs where quantity demanded equals quantity supplied.

0:49On a market diagram, that is where the two curves cross. Our vertical axis shows price, while quantity goes along the horizontal axis. The demand curve slopes downwards because a lower price normally encourages consumers to purchase more. An upward-sloping supply curve shows that higher prices encourage producers to offer more. We will assume other relevant conditions remain unchanged unless the example says otherwise. There is an important difference between a shift and a movement along a curve.

1:15Only a change in the product’s own price causes a movement along an existing curve. When other market conditions change, such as fashion or production costs, the whole curve shifts. After a shift, buyers or sellers want a different quantity even at the original price.

Changes in demand

1:30Suppose reusable bottles become more fashionable because consumers want to reduce disposable packaging waste. At each price, more people are willing and able to buy them. Demand therefore increases, shifting the curve to the right. The supply curve stays in place because we have not changed producers’ costs or productive capacity. At the original price, consumers now want more bottles than producers offer. This shortage puts upward pressure on the price as buyers compete for the available products.

1:56The higher price encourages firms to supply more. Some consumers also reduce their intended purchases as the product becomes more expensive. The new equilibrium is above and to the right of the original intersection. Both the market price and quantity sold have risen. The movement upwards along the unchanged supply curve is an extension of supply. Producers offer more because the price has increased, not because their whole curve has shifted.

2:19This explains why a higher price does not always mean fewer sales. Buyers have become more interested in bottles at every price. The eventual price increase limits how much their purchases grow, but does not reverse the original demand increase. More bottles are sold at the new equilibrium than before. Now consider a style of trainer that falls out of fashion. Consumers want fewer pairs at each price, so demand decreases and shifts left.

2:42At the original price, producers offer more than buyers want. This surplus of unsold stock creates pressure for sellers to lower their prices. As the price falls, producers become less willing to supply trainers. This movement down the unchanged supply curve is a contraction of supply. The new intersection lies below and to the left of the original equilibrium. Both price and quantity sold fall because demand has decreased.

Changes in supply

3:06For a supply change, imagine farmers introduce technology that reduces the cost of growing tomatoes. Efficient irrigation, for example, could reduce water use and production costs. Producers can now offer more tomatoes at every price. Supply increases, shifting the curve to the right. At the original price, farmers offer more tomatoes than consumers wish to buy. This surplus puts downward pressure on the price as sellers compete for customers. Cheaper tomatoes encourage consumers to purchase more.

3:33The market moves towards a new equilibrium with a lower price and a higher quantity sold. On the unchanged demand curve, that response is an extension of demand. Consumers buy more because tomatoes are cheaper, rather than because their preferences have changed. The original cause was an increase in supply. Keeping the cause separate from the response tells us which curve shifts and which has movement along it. Let us work through the opposite supply change using an illustrative tomato market.

3:59Initially, the equilibrium price is two dollars per kilogram, and one hundred kilograms are sold each week. A poor harvest then damages part of the crop. Farmers can offer fewer tomatoes at every price, so supply decreases and shifts left. First, identify the changed market condition rather than starting with the price. The harvest affects producers’ ability to supply tomatoes, so the supply curve shifts left. Demand remains unchanged because the example gives no change in consumers’ willingness or ability to buy.

4:26At the old price, the reduced quantity available creates a shortage. Next, follow the adjustment along the unchanged demand curve. The shortage puts upward pressure on price, and consumers respond by buying less. Suppose the new intersection shows three dollars per kilogram and sixty kilograms sold each week. The higher price has caused a contraction of demand. Finally, compare the two equilibria to describe the consequences. Price rises from two dollars to three dollars per kilogram, while weekly sales fall from one hundred to sixty kilograms.

4:55The poor harvest decreased supply, and the higher price then caused consumers to buy less.

Avoiding errors and exam answers

5:00A sugar tax on soft drinks is another cause of a decrease in supply. The government charges producers a tax on each unit sold, which adds to their costs. Producers therefore offer fewer drinks at each price, so the supply curve shifts left. The price rises, causing a contraction along the unchanged demand curve, and fewer drinks are sold. A common mistake is to shift demand simply because consumers buy less after a price rise.

5:25In the poor harvest example, their underlying willingness to buy at each price has not changed. Their lower purchases are a contraction of demand along the existing curve. Likewise, firms offering more bottles after demand rises are extending supply along the same curve, not shifting it. Another mistake is to assume that every price rise reduces sales. In the bottle example, a demand increase raised both price and quantity sold.

5:48The poor tomato harvest, by contrast, raised price while reducing sales. To explain the outcome correctly, identify what changed first and then trace the market’s response. If both demand and supply shift, one outcome can be uncertain without information about their relative sizes. For example, rising demand combined with falling supply pushes price upwards. Their effects on quantity sold work in opposite directions. A diagram must therefore reflect the particular changes described, rather than assume a definite sales outcome.

6:17In a multiple-choice question, match the changed condition to the correct curve before comparing the final intersection with the original one. A structured question could ask you to explain how improved production technology affects price and sales. In Cambridge terms, explain means setting out reasons, showing why and how the outcome happens. Build a connected chain from lower costs to the new equilibrium. A suitable answer starts with the new technology lowering production costs, so firms supply more at each price.

6:44The supply curve shifts right, creating a surplus at the original price. Competition between sellers puts downward pressure on price. As the price falls, demand extends along the unchanged curve. The new equilibrium therefore has a lower price and a larger quantity sold. A question could instead ask you to discuss whether a higher market price always means lower sales. Discuss means writing about the issue in depth in a structured way, covering both sides.

7:08Supporting the claim, a poor harvest decreases supply, which raises price and reduces the quantity sold. A rise in demand from a fashion trend, however, pushes up both price and sales, which goes against the claim. On balance, the claim is not always true, because a higher price brings lower sales only when a fall in supply is the cause. The four patterns now fit together rather than standing as separate facts to memorise.

7:30Increasing demand raises price and sales, while decreasing demand lowers both. An increase in supply lowers price but raises the quantity sold. When supply decreases, price rises and sales fall, assuming the other curve remains unchanged. Every diagram tells a sequence: a market condition changes, one curve shifts, and the original price creates a shortage or surplus. Price then adjusts, producing movement along the other curve. The new intersection gives the final price and quantity sold.

7:59Understanding that sequence lets you explain price changes instead of merely recalling their directions.