 With what we've learned so far, we know that prices are determined by demand and supply. So it's logical then that changes in price will be determined by changes in demand and supply. We're going to examine these changes more closely to improve our understanding of the complex markets we live in and to try to predict future movements. Let's first deal with a change in demand. Before we start looking at what might cause a change in demand, remember the distinction between a change in demand and a change in quantity demanded, which is caused by a change in price. We're now referring to those factors that cause the whole demand curve to shift. These would be any factors other than the price that can influence the demand for a good or service. It's factors like taste, income, the number of potential buyers, the price of related goods and other factors. Let's use our market for fried chicken pieces to analyse a change in demand. Our market for fried chicken consists of a demand curve showing the behaviour of consumers of fried chicken and a supply curve representing the suppliers of fried chicken. Given these demand and supply curves, the market is in equilibrium at a price of four round per piece, where the quantity demanded is 3,000 pieces and the quantity supplied is 3,000 pieces. Let's now consider what happens if there's an increase in the income of households. How do you think an increase in income will affect the market for fried chicken? A rise in income boosts the demand for fried chicken. Households can now afford to buy more fried chicken at each price. This is indicated by a rightward shift of the demand curve. According to our new demand curve, at the old equilibrium price of four round, the quantity demanded is now 4,200 pieces, but the quantity supplied is still only 3,000 pieces. The supply curve hasn't shifted. Well, why would it? None of the factors that affect the supply have changed. Income, Y, is not part of the supply equation. So the market has shifted out of equilibrium, with households demanding more than is being supplied. The excess demand, the difference between the quantity demanded and the quantity supplied, is equal to 1,200 pieces. So a disequilibrium now exists. In any free market where choice governs market trends, one side can't be dissatisfied indefinitely, and at some point, corrective forces come into play to ensure that the market moves back towards equilibrium. But what are these mysterious forces that keep the market in check? Buyers now compete with one another, and this forces the price to rise. And as the price starts to rise, the quantity demanded by buyers decreases, while the quantity supplied starts to increase, reducing the excess demand. If the price rises from 4 to 4.50, quantity demanded drops from 4,200 to 4,000 pieces, while quantity supplied increases from 3,000 to 3,200 pieces. The excess demand is now smaller. This rise in the price of fried chicken will continue until there's no excess demand. This new equilibrium position takes place at the price of 5 round, and an equilibrium quantity of 3,600 pieces. The increase in income has forced the market to a higher equilibrium price and quantity. Note that it was only the demand curve that shifted. The supply curve didn't shift. There was only an upward movement along the supply curve, as happens when there's an increase in price. Given this information, who is responsible for the increase in price? Well, in this case, the price went up because demand rose, and this happened because consumers had more income. So really, it's the buyers who are responsible for the increase in price. If they hadn't demanded more, the price wouldn't have gone up. So you see, suppliers are not always the ones to blame for an increase in price. To summarise then, any factor other than the price which increases the demand for a good or service will force the equilibrium price and quantity to rise. The opposite occurs when there's a decrease in demand for a product. Assume, for instance, that there's a drop in the price of a substitute good like chicken burgers. Now, what would be the impact of this on the market demand for fried chicken pieces? Well, a decrease in the price of chicken burgers caused me to buy one instead of the usual fried chicken, and households in this market will generally do the same. This will cause a fall in demand for fried chicken, and the demand curve shifts to the left. At a price of four round, the quantity demanded might now be only 1,800 pieces, while the quantity supplied is still 3,000. And we now have an excess supply in the market. This excess supply will cause the price to drop. Suppliers will compete with one another in order to sell their excess stock. As the price drops, buyers are able and willing to buy more and more, and suppliers produce less and less. The process continues until equilibrium is reached, now at a price of three round, and a quantity of 2,400 pieces. To summarise then, any factor other than the price which decreases the demand for a good or service will eventually cause the equilibrium price and the equilibrium quantity to fall. Let's turn our attention to a change in supply. What are the factors that might cause a change in supply? That is a shift of the supply curve. OK, to start with, let's now assume there's an increase in the number of suppliers. With more businesses selling chicken, the supply curve will shift to the right, so the quantity supplied at a price of four round might now be 4,200 pieces. But the quantity demanded is still only 3,000 pieces, nothing has happened to cause a change in demand. We therefore have an excess supply in the market. Now what does this mean and how will the market correct itself? Suppliers will now have to compete to get rid of the product and as we've seen, luring the selling price is the most obvious way of doing this. As the price falls, the quantity demanded grows and suppliers start to produce less. This correction, this process of falling prices will continue until equilibrium is reached again. This is now at a price of three round, where the quantity demanded is equal to the quantity supplied of 3,600 pieces. Comparing the new equilibrium position with the equilibrium position before, the increase in supply you can see shows that an increase in supply leads to a decrease in price and an increase in the quantity demanded and supplied. To summarise that, any factor other than the price which increases the supply of a good or service will eventually cause the equilibrium price to fall and the equilibrium quantity to rise. So what about an increase in the cost of production? An increase in the cost of production causes a drop in supply. Well, if it's more expensive to produce, suppliers will cut back on their production and this decrease in supply is reflected in a shift of the supply curve to the left. As we've seen, this will cause an excess demand, gradually forcing prices to rise. This correction continues until a new equilibrium is reached at a higher price and lower quantity. To summarise then, any factor other than the price which decreases the supply of a good or service will eventually cause the equilibrium price to rise and the equilibrium quantity to decrease. We can summarise all of these permutations by completing the following table. An increase in demand causes a rightward shift of the demand curve. The price will increase, which in turn causes an increase in quantity. With a decrease in demand, there's a leftward shift of the demand curve. The price drops and the quantity decreases as well. But with an increase in supply, there's a rightward shift of the supply curve. The price drops but the quantity rises. And for a decrease in supply, the supply curve shifts to the left. The price rises and the quantity falls. Looking at the information in the table, we can say that if both the price and quantity fall, it must have been caused by a decrease in demand. The market has shrunk. And if the price increases while the quantity decreases, this has to be due to a decrease in supply. We now have a very useful tool to explain and predict the impact on prices and quantity. Take the time to get familiar with this table and the curves behind it. It'll serve you well in both this course and in your life as a consumer and perhaps one day as a business person in your own right. Now what happens when there's a change in both demand and supply? The protea is a very popular flower. Over the last five years, the quantity sold on the fresh flower market has increased steadily, but the price has remained largely unchanged. The explanation for this is to be found in an increase in both the demand and supply. The fact that the price remained unchanged means that the increased demand was matched by an increase in supply. This increase in supply might have been due to an increase in the number of producers, or it might have been the result of a change in technology used by existing producers, making them more efficient. In terms of demand and supply curves, the shift of the demand curve is matched by a shift in the supply curve, leaving the prices unchanged. Now let's assume that demand rises while supply falls. If the shift in the demand curve matches the shift in the supply curve, we end with a higher price and the same quantity. If the demand curve shifts more than the supply curve, we end up with a higher price and a higher quantity. If the demand curve shifts less than the supply curve, we end up with a higher price and a lower quantity.