Price Changes (Copy)
2.6 Price Changes
2.6.1 Causes of Price Changes
- Prices change due to shifts in demand or supply.
- Not movements along curves, but shifts that create a new equilibrium.
| Cause | Shift | Effect on Price | Example |
|---|---|---|---|
| Increase in demand | Demand curve shifts right | Price ↑ | Eid season → more demand for clothes |
| Decrease in demand | Demand curve shifts left | Price ↓ | Outdated phones lose popularity |
| Increase in supply | Supply curve shifts right | Price ↓ | Better technology reduces car costs |
| Decrease in supply | Supply curve shifts left | Price ↑ | Flood damages crops → food prices rise |
- Demand-driven change: tastes, income, substitutes, complements, population.
- Supply-driven change: production costs, technology, weather, subsidies/taxes.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course
2.6.2 Consequences of Price Changes
- Price changes affect consumers, producers, and resource allocation.
| Consequence | Impact | Example |
|---|---|---|
| Consumer spending | If price ↑, some consumers can’t afford → demand contracts | Petrol price rise → less car use |
| Producer revenue | If price ↑, producers may earn more (if demand inelastic) | Oil firms gain more with higher oil price |
| Incentives to produce | Higher prices → more firms enter market; lower prices → exit | High gold prices → more mining |
| Resource allocation | Resources move to more profitable goods/sectors | More labour shifts to IT when tech salaries rise |
| Market equilibrium | New price + quantity established after shifts | Drought reduces supply → higher equilibrium price for rice |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course
Quick Examples for Exams
- Demand ↑ for housing in big cities → house prices rise.
- Tech improvement in solar energy → solar panel prices fall.
- Poor harvest → wheat price rises, affecting bread prices.
- Consumer preference shifts to healthy drinks → soft drink prices fall.
Memory Hooks
- Price changes come from shifts, not movements.
- Demand shift = price moves same direction.
- Supply shift = price moves opposite direction.
- Always redraw diagram → old equilibrium → new equilibrium.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course