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CIE IGCSE Economics Your notes
2.6 Price Changes

Contents
2.6.1 Changing Market Conditions
Page 1 of 6
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2.6.1 Changing Market Conditions

Your notes
Causes & Consequences of Price Changes
Real world markets are constantly changing & are referred to as dynamic markets
Market equilibrium can change every few minutes in some markets (e.g. stocks and shares), or every
few weeks or months in others (e.g clothing)
Any change to a condition of demand or supply will temporarily create disequilibrium & market forces
will then seek to clear the excess demand or supply
Real World Example: Changes to Demand That Increase Price
During lock downs associated with the Covid-19 pandemic, furniture retailers experienced
unexpectedly high demand for their products (especially desks and sofas)
Diagram showing an increase in demand for desks due to a temporary change in tastes/fashions
Diagram Analysis
Due to the Covid mandated change of working from home, consumers experienced a temporary
change in taste as they sought to set up comfortable home offices
This led to an increase in demand for desks from D1→D2
At the original market clearing price of P1, a condition of excess demand now exists
The demand for desks is greater than the supply
Page 2 of 6
In response, suppliers raise prices

This causes a contraction of demand and an extension of supply leading to a new market
equilibrium at P2Q2 Your notes
Both the equilibrium price (P2) and the equilibrium quantity (Q2) are higher than before
The excess demand in the market has been cleared
Examiner Tip
Be systematic in thinking through the order of changes in market conditions. E.g. An increase in
demand (shift in demand) will cause a rise in price. The higher price will cause an extension of supply
(not a shift of supply)
Real World Example: Changes to Supply That Increase Price

In September 2022, Hurricane Fiona destroyed much of Puerto Rico's crop of plantains (a necessity in
the diet of local people)
Diagram showing a decrease in supply of plantains in Puerto Rico due to a supply shock caused by
Hurricane Fiona
Diagram Analysis
Due to Hurricane Fiona, Puerto Rico is experiencing a supply shock in its plantain market
This causes a decrease in supply of S1→S2
At the original market clearing price of P1, a condition of excess demand now exists (shortage)
Page 3 of 6
The demand for plantain is greater than the supply
In response, sellers in Puerto Rico raise prices Your notes

This causes a contraction of demand & an extension of supply leading to a new market
equilibrium at P2Q2
The equilibrium price (P2) is higher & the equilibrium quantity (Q2) is lower than before
The excess demand in the market has been cleared
Real World Example: Changes to Demand That Decrease Price

Demand for lobsters in Maine, USA has been falling steadily in recent months
This has resulted in a price fall from $12.35 /pound on the 1st April to $9.35 /pound on the 1st May
Diagram showing a decrease in demand for lobsters due to a decrease in real income
Diagram Analysis
In recent months the USA has been experiencing an increasing rate of inflation
Inflation lowers the purchasing power of money in a consumer's pocket & so effectively reduces
their real income
With reduced real income fewer luxuries are consumed
This led to a decrease in demand for lobsters from D1→D2
At the original market clearing price of P1, a condition of excess supply now exists
The demand for lobsters is less than the supply
In response, suppliers gradually reduce prices
Page 4 of 6
This causes a contraction of supply & an extension of demand leading to a new market
equilibrium at P2Q2
Both the equilibrium price (P2) & the equilibrium quantity (Q2) are lower than before Your notes
The excess supply in the market has been cleared
Real World Example: Changes to Supply That Decrease Price
In order to help meet their climate targets & to lower energy costs for households, the EU is providing
subsidies for solar panels
Diagram showing an increase in supply of solar panels in the EU due to a per unit subsidy
Diagram Analysis
To help meet its climate change targets & lower household energy bills the EU has provided a subsidy
to solar panel retailers
This causes an increase in supply of S1→S2
At the original market clearing price of P1, a condition of excess supply now exists (surplus)
The supply of solar panels is greater than the demand
In response, sellers in the EU lower prices

This causes an extension of demand & a contraction of supply leading to a new market
equilibrium at P2Q2
The equilibrium price (P2) is lower & the equilibrium quantity (Q2) is higher than before
The excess supply in the market has been cleared
Page 5 of 6
Examiner Tip
Your notes
MCQ frequently require you to identify the consequences of dynamic changes in markets e.g. the
new equilibrium point after a change in the market). Memorise the conditions of demand and the
conditions of supply - by doing so, you will save valuable thinking time in the exam.
In structured questions, explaining the steps in the dynamic change is often referred to as analysis &
students frequently leave out some steps in the explanation
Here is a systematic process to help build your explanation:

Step 1: From the scenario, identify if the change in condition is on the demand side or supply side
Step2: State which way the demand or supply curve moves and use notation e.g. S1→S2
Step 3: State the disequilibrium that now exists at the original market price (excess demand or excess
supply)
Step 4: State if sellers raise or lower prices to clear the disequilibrium
Step 5: Explain the relevant contraction & extension that occurs on the demand & supply curves due
to the change in price
Step 6: State the new market equilibrium points e.g. P2Q2
Step 7: Explain the market outcome (is the new price/quantity higher/lower than the original?)
Page 6 of 6

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CIE IGCSE Economics Your notes

2.6 Price Changes

2.6.1 Changing Market Conditions

In response, suppliers raise prices

Real World Example: Changes to Supply That Increase Price

The demand for plantain is greater than the supply

In response, sellers in Puerto Rico raise prices Your notes

Real World Example: Changes to Demand That Decrease Price

In response, suppliers gradually reduce prices

In response, sellers in the EU lower prices

Here is a systematic process to help build your explanation:

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