Price Changes | A-Level Economics Model Paragraph (AQA, Edexcel)
A market is a place where buyers and sellers meet to exchange goods and services. The market price of a good or service would be found at equilibrium, which is where demand meets supply. The market price can only change if demand or supply shift.
Recap
Factors of demand (PIRATES):
- population
- income
- related goods
- complements
- substitutes
- advertising
- trends
- seasons
Factors of supply (PCTWINS):
- productivity
- costs of production
- technology
- indirect taxes
- number of firms
- seasons
Example 1
One factor that could cause an increase in the price of tea is an increase in the price of coffee. Demand is the number of goods and services that people are willing and able to buy at each given price. If demand for tea increases, then the price of tea would also increase. One factor that can cause demand for tea to shift to the right is if the price of coffee increases. Tea and coffee are substitute goods, which means they have a positive XED (cross elasticity of demand). If the price of coffee increases, many consumers would consider switching to tea as they see it as a close substitute. That would mean that there is an increase in the quantity of tea that people are now willing and able to buy. The diagram below shows that this right shift in demand leads to an increase in the price of tea from p1 to p2.
Example 2
The price of tea could also increase is a left shift in the supply curve for tea. Supply is the quantity of goods and services that firms are willing and able to sell at each price. Supply could decrease due to a decrease in productivity. Productivity can be measured as output per worker. If workers are slower, or they are working with older machinery, then supply would shift to the left. This is because there would be an decrease in the quantity of milk that firms are willing and able to produce at each given price. This let shift in supply would cause the equilibrium price of tea to increase from p1 to p2.