➡️ What Happens When Demand Shifts?
The Pattern: When demand shifts, price and quantity move in the same direction. Demand right → P↑ Q↑. Demand left → P↓ Q↓.
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Increase in demand (D shifts right)
- D₁ shifts right to D₂ (e.g. higher income for a normal good)
- At the old price, there is now a shortage (Qd > Qs)
- Price is bid UP to a new, higher equilibrium
- Result: BOTH price and quantity INCREASE (P↑ Q↑)
Decrease in demand (D shifts left)
- D₁ shifts left to D₃ (e.g. negative health report about the good)
- At the old price, there is now a surplus (Qs > Qd)
- Price falls to a new, lower equilibrium
- Result: BOTH price and quantity DECREASE (P↓ Q↓)
The exam question from May 2024 asked students to show demand and supply curves and explain how a change in demand would affect equilibrium price. Always draw the original equilibrium FIRST, then show the shift to the new equilibrium.
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⬅️ What Happens When Supply Shifts?
The Pattern: When supply shifts, price and quantity move in opposite directions. Supply right → P↓ Q↑. Supply left → P↑ Q↓.
Increase in supply (S shifts right)
- S₁ shifts right to S₂ (e.g. new technology lowers costs)
- At the old price, there is a surplus → price falls
- Result: price DECREASES, quantity INCREASES (P↓ Q↑)
Decrease in supply (S shifts left)
- S₁ shifts left to S₃ (e.g. drought reduces wheat harvest)
- At the old price, there is a shortage → price rises
- Result: price INCREASES, quantity DECREASES (P↑ Q↓)
Past paper scenario: 'Bad weather destroys part of the wheat crop.' This is a decrease in supply → S shifts left → price of wheat rises, quantity falls. You would draw S₁ → S₃, show old and new equilibrium, and explain the adjustment.
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🔀 What If Both Curves Shift?
Sometimes BOTH demand and supply change at the same time. In this case, we can predict what happens to one variable but NOT the other — unless we know which shift is larger.
The four possible combinations
- D↑ and S↑ → Q definitely rises, but P is uncertain (depends on which shift is bigger)
- D↓ and S↓ → Q definitely falls, but P is uncertain
- D↑ and S↓ → P definitely rises, but Q is uncertain
- D↓ and S↑ → P definitely falls, but Q is uncertain
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When both curves shift: one variable has a definite outcome, the other is indeterminate (depends on the relative size of the shifts). State this clearly in your exam answer.
If the exam gives you a scenario with two changes, identify each one separately: 'The increase in population shifts D right, while the new technology shifts S right. Quantity will definitely increase, but the effect on price depends on which shift is larger.'
📌 Movement along vs shift (high-frequency exam trap)
- Change in price of the good itself → movement along D or S (change in quantity demanded/supplied)
- Change in a determinant (income, costs, tech, taxes, etc.) → shift of the entire curve
Step 1: Identify the cause. Step 2: Decide which curve shifts. Step 3: State direction. Step 4: Show new equilibrium (E2) with new P and Q.
🍬 Indirect tax diagram language
- An indirect tax on producers shifts supply left/up by the amount of the tax
- The vertical gap between the new and old supply curve is the tax per unit (the tax wedge)
- New equilibrium: higher price paid by consumers, lower quantity traded
- Government revenue is a rectangle: (tax per unit × new quantity)