Price Changes | O Level Economics 2281 & IGCSE Economics 0455 | Detailed Free Notes To Score An A Star (A*)

2.6.1 Causes of Price Changes

Price changes occur due to shifts in demand and/or supply in response to changes in market conditions. These changes disrupt equilibrium and lead to a new price and quantity.

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Key Causes of Demand Shift (Right or Left)

1. Changes in Consumer Income:
   • Higher income → Increase in demand for normal goods.
   • Lower income → Increase in demand for inferior goods.
2. Changes in Consumer Tastes and Preferences:
   • A product becoming fashionable → Demand increases.
   • Negative publicity or changing trends → Demand falls.
3. Price of Related Goods:
   • Substitutes: Rise in price of one → increase in demand for the other.
   • Complements: Rise in price of one → decrease in demand for both.
4. Population Changes:
   • Growing population → Increased demand.
   • Ageing or shrinking population → May lower demand.
5. Expectations of Future Prices:
   • Anticipated price rise → consumers buy more now.
6. Government Policies:
   • Subsidies, taxes, regulations affecting demand (e.g., banning plastic straws reduced demand).

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Key Causes of Supply Shift (Right or Left)

1. Cost of Production:
   • Higher costs (wages, raw materials) → Supply decreases.
   • Lower costs → Supply increases.
2. Technological Advances:
   • New tech makes production more efficient → Supply increases.
3. Natural Factors:
   • Floods, droughts, earthquakes → disrupt supply (especially for agriculture).
   • Good weather → bumper crops → supply increases.
4. Government Policies:
   • Taxes (e.g., excise duties) reduce supply.
   • Subsidies increase supply.
5. Number of Producers:
   • More producers enter → supply increases.
   • Exit of firms → supply falls.
6. Expectations of Future Prices:
   • Expectation of higher future price → firms may hold back supply.

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2.6.2 Consequences of Price Changes

Changes in price affect market equilibrium, consumer behavior, and producer decisions.

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Price Change Due to Demand Shift

Scenario 1: Increase in Demand (e.g., viral social media campaign for a product)

• Demand curve shifts right.
• New equilibrium: higher price and higher quantity.
• Producers increase output to meet demand.
• Consumers pay more.

Scenario 2: Decrease in Demand (e.g., outdated fashion)

• Demand curve shifts left.
• New equilibrium: lower price and lower quantity.
• Producers may cut back output or shut down.

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Price Change Due to Supply Shift

Scenario 3: Increase in Supply (e.g., improved technology)

• Supply curve shifts right.
• New equilibrium: lower price and higher quantity.
• Consumers benefit from cheaper goods.
• May reduce revenue if PED is elastic.

Scenario 4: Decrease in Supply (e.g., drought)

• Supply curve shifts left.
• New equilibrium: higher price and lower quantity.
• Scarcity leads to competition and inflationary pressure.

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Combined Shifts: Demand and Supply

• Both Demand and Supply Increase:
  • Quantity definitely rises.
  • Price impact depends on magnitude of shifts.
• Demand Increases, Supply Decreases:
  • Price rises significantly.
  • Quantity may rise or fall depending on magnitude.
• Demand Decreases, Supply Increases:
  • Price falls sharply.
  • Quantity effect depends on strength of shift.

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Diagrammatic Analysis

Each cause should be accompanied by:

• Demand-Supply diagram showing:
  • Original equilibrium (E1)
  • New equilibrium (E2)
  • Direction of shifts
• Label axes clearly: Price (Y-axis), Quantity (X-axis)
• Indicate shifts with arrows and dotted curves if needed.

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Effects on Stakeholders

Stakeholder	Price Rise Impact	Price Fall Impact
Consumers	May reduce demand or switch goods	More affordable products
Producers	Higher profit potential	Lower revenues, possible losses
Government	May intervene to stabilize markets	May offer subsidies or support producers

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Exam Tip

• Explain each price change using realistic causes and market examples.
• Always include both price and quantity changes.
• Use correct and labeled diagrams.
• Use real-life examples:
  • Oil price rises after Middle East tensions.
  • Fall in smartphone prices due to mass production in China.