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 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

    
    

• In response, suppliers raise prices

  • This causes a contraction of demand and an extension of supply leading to a new market equilibrium at P2Q2

  • Both the equilibrium price (P2) and the equilibrium quantity (Q2) are higher than before

  • The excess demand in the market has been clear

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)

  • The demand for plantain is greater than the supply

    
    

• In response, sellers in Puerto Rico raise prices

  • 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