2.6 Price Changes

📖 Main Content

Part 1: Understanding Dynamic Markets

Real-world markets are always changing. Prices rarely stay the same for long. Every day, things happen that cause buyers or sellers to behave differently — and when that happens, the price of a good or service shifts.

A market is said to be in equilibrium (balance) when the amount buyers want to buy is exactly equal to the amount sellers want to sell. This gives us an equilibrium price (the price at which the market clears) and an equilibrium quantity (the amount bought and sold at that price).

When conditions change — for example, when people's incomes rise, or when a natural disaster destroys crops — the balance is disturbed. Economists call this disequilibrium (when the market is out of balance). Market forces then push the price up or down until a new equilibrium is reached.

🔵 Changes in Demand That Cause Prices to Rise

If demand for a good increases (the demand curve shifts to the right), the price will rise.

What causes demand to increase?

• Rise in consumers' incomes
• Rise in the price of a substitute good (so buyers switch to this good instead)
• Fall in the price of a complementary good (goods used together)
• Change in tastes or fashion in favour of this good
• Growth in population
• Advertising that makes the product more desirable

What happens step by step:

1. Demand increases — the demand curve shifts right (from D to D₁)
2. At the old price (P), there is now excess demand — buyers want more than sellers are supplying
3. This shortage pushes the price up (from P to P₁)
4. As the price rises, sellers are willing to supply more — this is called an extension in supply (a movement up the supply curve)
5. A new, higher equilibrium is reached at price P₁ and quantity Q₁

📊 Diagram — Increase in Demand:

Price
  |         S
  |        /
P₁|-------/------x  ← new equilibrium
  |      / \    /
P |-----/---x  /  ← old equilibrium
  |    /    D₁/
  |   /     /
  |  /    D/
  | /    /
  |/   /
  +------------------→ Quantity
       Q    Q₁

• D shifts right to D₁
• Price rises from P to P₁
• Quantity rises from Q to Q₁
• The supply curve does not shift — sellers simply move along it (extension in supply)