Changing Market Conditions | Economics for GCSE/IGCSE - Year 11 PDF Download

Causes & Consequences of Price Changes

• Real-world markets are in a constant state of flux and are often termed dynamic markets.
• Market equilibrium can undergo rapid changes, fluctuating every few minutes in certain markets (such as stocks and shares) and every few weeks or months in others (like the clothing market). 
• Whenever there is a shift in either the demand or supply conditions, a temporary state of disequilibrium arises, leading market forces to rectify the excess demand or supply. 

Real World Example: Changes to Demand That Increase Price

• During the lockdowns linked to the Covid-19 pandemic, furniture retailers faced an unexpected surge in demand for their products, particularly desks and sofas.

Diagram Analysis:

• Increased Demand for Desks
  • This situation arose due to a surge in demand for desks from D₁ to D₂.
• Market Imbalance
  • Initially, at the price of P₁, there is excess demand where the demand surpasses the supply.
  • This leads to a scenario of original excess demand in the market.
• Price Adjustment
  • Subsequently, suppliers respond by increasing prices, triggering a series of changes.
  • This price hike causes a contraction in demand and an extension in supply, culminating in a new market equilibrium at P₂ and Q₂.
  • Both the equilibrium price (P₂) and quantity (Q₂) rise compared to the previous state, effectively eliminating the excess demand.
• Market Equilibrium Achieved
  • The adjustments lead to a state where the market demand equals the supply, clearing the excess demand.

Real World Example: Changes to Supply That Increase Price

Supply Shock and Market Equilibrium

• Following Hurricane Fiona, Puerto Rico faced a supply shock, transitioning from supply level S₁ to S₂.
• At the original market price (P₁), a situation of excess demand emerged, indicating a shortage where demand surpassed supply.
• In response, local sellers raised prices, causing a shift in demand and supply. This resulted in a new market equilibrium at price P₂ and quantity Q₂.
• The new equilibrium showcased a higher price (P₂) and a lower quantity (Q₂) compared to pre-hurricane conditions, effectively resolving the initial excess demand.

Real World Example: Changes to Demand That Decrease Price

• In Maine, USA, the demand for lobsters has steadily decreased.
• Result: Prices fell from $12.35/pound on April 1st to $9.35/pound on May 1st.

Diagram Analysis:

• In recent times, the United States has been facing a rise in the inflation rate.
• When inflation occurs, the purchasing power of money diminishes for consumers.
• This reduction in purchasing power effectively leads to a decrease in real income for individuals.

Consequence on Consumption Patterns

• Due to the decreased real income, individuals tend to consume fewer luxury goods.
• As a result of this shift in consumption behavior, the demand for lobsters decreases from D₁ to D₂.

Market Equilibrium Adjustment

• Initially, at the original market price of P₁, there is an oversupply of lobsters in the market.
• Since demand is lower than supply, suppliers start reducing prices gradually to address the excess supply.
• This price reduction leads to a contraction in supply and an extension of demand.
• Eventually, a new market equilibrium is established at price P₂ and quantity Q₂.
• Both the equilibrium price (P₂) and quantity (Q₂) are lower than the initial values.

Resolution of Excess Supply

• Through the adjustments in price and quantity, the excess supply of lobsters in the market is eliminated.

Real World Example: Changes to Supply That Decrease Price

• In order to support their climate goals and reduce energy expenses for households, the European Union (EU) is offering subsidies for solar panels.

Diagram Analysis:

• The EU's provision of a subsidy to solar panel retailers leads to an increase in supply from S₁ to S₂.
• Initially, at the original market price of P₁, there is an excess supply or surplus where the supply surpasses the demand.
• Consequently, sellers reduce prices, triggering an extension of demand and a reduction in supply, resulting in a new market equilibrium at P₂ and Q₂.
• The new equilibrium showcases a lower price (P₂) and a higher quantity (Q₂) compared to the previous state, effectively clearing the excess supply in the market.