CHAPTER 10: PRICE CHANGES
EFFECT OF CHANGES IN DEMAND- Changes in demand cause a change in price and a
movement along the supply curve.
INCREASE IN DEMAND
Price ($)
S
P1
P
x
y
D1
D
0
Quantity
Q





Q1
An increase in demand will cause the demand curve to shift to the right. (D to D1)
A shift of the demand curve to the right will create a shortage in the market of xy.
This shortage drives the price up. (P to P1)
The higher price results in an extension in supply until a new equilibrium price (P1) is
reached.
The new equilibrium quantity will increase to Q1.
DECREASE IN DEMAND
Price ($)
S
P
x
y
P1
D
D1
0
Q1
Q
Quantity




A decrease in demand will cause the demand curve to shift to the left. (D to D1)
A shift of the demand curve to the left will create a surplus in the market of xy.
This surplus forces the prices down. (P to P1)
The lower price results in a contraction in supply until a new equilibrium price (P1) is
reached.
The new equilibrium quantity will decrease to Q1.

EFFECT OF CHANGES IN SUPPLY- Changes in supply cause a change in the price and a movement along
the demand curve.
INCREASE IN SUPPLY
Price ($)
S
S1
P
x
y
P1
D
0
Quantity
Q




Q1
An increase in supply will cause the supply curve to shift to the right (S to S1).
A shift of the supply curve to the right will create a surplus in the market of xy.
This surplus forces the prices down (P to P1).
The lower price results in an extension in demand until a new equilibrium price (P1) is
reached.
 The new equilibrium quantity will decrease to Q1.
DECREASE IN SUPPLY




A decrease in supply will cause a shift of the supply curve to the left (S to S1).
A shift of the supply curve to the left will cause a shortage in the market of xy.
This shortage will drive up the prices (P to P1).
This higher price results in a contraction in demand until a new equilibrium price (P1) is
reached.
 The new equilibrium quantity will decrease to Q1.
Price ($)
S1
S
P1
P
x
y
D
0
Q1
Q
Quantity