How price changes are caused by changes in demand and supply

What we’ll learn

We’ll explore how changes in demand and supply move the market price and quantity. We’ll use simple analogies, clear examples, and even a quick maths check with LaTeX.

Demand shows how many buyers want a product at each price. Think of a lemonade stand on a hot day.

• When it’s very hot, more students want lemonade → demand increases.
• When a new flavour (e.g., strawberry) is added, more people want it → demand shifts right.

Mathematically: D(p) = a - bp (where a and b are constants). If a rises, the whole curve moves right.

Supply shows how many sellers are willing to offer a product at each price.

• If the cost of lemons drops, sellers can produce more at the same price → supply increases.
• New technology (e.g., a faster juicer) lets the stand make more lemonade quickly → supply shifts right.

Mathematically: S(p) = c + dp. If c rises, the curve shifts right.

At equilibrium, the quantity demanded equals the quantity supplied. The price that balances the two is the market price.

Set D(p) = S(p) to find the equilibrium price p* and quantity q*:

a - bp* = c + dp* → p* = (a - c)/(b + d)

Then q* = D(p*) = S(p*).

1. Demand increases (shift right): At the old price, quantity demanded > quantity supplied → a shortage. Sellers raise the price until a new equilibrium is reached.
2. Demand decreases (shift left): At the old price, quantity supplied > quantity demanded → a surplus. Sellers lower the price until a new equilibrium is reached.
3. Supply increases (shift right): At the old price, quantity supplied > quantity demanded → a surplus. Sellers lower the price.
4. Supply decreases (shift left): At the old price, quantity demanded > quantity supplied → a shortage. Sellers raise the price.

📈 Key takeaway: The direction of the price change depends on whether the shift is in demand or supply, not just the size of the shift.

Initial conditions: price = £1, quantity = 50 cups.

Scenario: A new strawberry flavour becomes popular → demand shifts right.

Result: The new equilibrium price is £1.20 and the quantity sold is 60 cups.

• Always label the axes when drawing supply/demand curves.
• Use the “shift” terminology (right = increase, left = decrease).
• Show the new equilibrium clearly – mark the new price and quantity.
• When asked to explain a price change, state the cause (demand or supply shift) and the direction of price change.
• Remember the shortage–surplus logic to justify price movements.

1. If the price of coffee beans falls, what happens to the supply of coffee?

• A) Supply decreases (shift left) ❌
• B) Supply increases (shift right) ??

2. A new government tax on cars is introduced. Which curve shifts?

• A) Demand shifts left ??
• B) Supply shifts right ❌