Changing Market Conditions (CIE IGCSE Economics)

• 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
     
• 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 cleared

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
    
    

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
  • 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
  • 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