Causes and Consequences of Price Changes
Changes in non-price factors affecting demand or supply will shift curves and change the equilibrium price and equilibrium quantity in a market.
🔄 1. Changes in Supply
📉 A Decrease in Supply (Leftward Shift)
When supply decreases, the supply curve shifts left.
🔹 Causes:
Government taxes (e.g., tax on tobacco)
Bad weather affecting crops
Higher production costs
Fewer producers in the market
🔹 Effects:
Price increases (P1 → P2)
Quantity traded decreases (Q1 → Q2)
📌 Example:
A sales tax on cigarettes reduces supply, pushing prices up and lowering the quantity sold.
📈 An Increase in Supply (Rightward Shift)
When supply increases, the supply curve shifts right.
🔹 Causes:
Government subsidies
Favourable weather for farmers
Lower production costs
Improved technology
🔹 Effects:
Price decreases (P1 → P2)
Quantity traded increases (Q1 → Q2)
📌 Example:
A subsidy for farmers increases agricultural output, reducing price and increasing quantity sold.
🔄 2. Changes in Demand
📈 An Increase in Demand (Rightward Shift)
When demand increases, the demand curve shifts right.
🔹 Causes:
Higher disposable income
Effective advertising
Increase in population
Rise in price of substitute goods
🔹 Effects:
Price increases (P1 → P2)
Quantity traded increases (Q1 → Q2)
📌 Example:
Higher household incomes increase demand for new cars, raising both price and quantity sold.
📉 A Decrease in Demand (Leftward Shift)
When demand decreases, the demand curve shifts left.
🔹 Causes:
Negative publicity
Lower incomes during a recession
Lower price of substitute goods
Change in consumer preferences
🔹 Effects:
Price decreases (P1 → P2)
Quantity traded decreases (Q1 → Q2)