Cambridge IGCSE Economics 0455
Syllabus points
- Analyse how shifts in demand and supply cause the equilibrium to change.
- Explain the consequences of price changes for consumers, producers and workers.
How the equilibrium changes
When demand or supply shifts, a new equilibrium forms. To analyse any event, decide which curve shifts and in which direction, then read off the new price and quantity.
| Change | Effect on price | Effect on quantity |
|---|---|---|
| Demand rises (shifts right) | Rises | Rises |
| Demand falls (shifts left) | Falls | Falls |
| Supply rises (shifts right) | Falls | Rises |
| Supply falls (shifts left) | Rises | Falls |
Key definition
| Term | Definition |
|---|---|
| Shift in equilibrium | A new market-clearing price and quantity caused by a shift in demand or supply. |
Consequences of price changes
Price changes affect different groups:
- Consumers — a higher price reduces what they can afford; a lower price benefits them.
- Producers — a higher price (from higher demand) raises revenue; a cost-driven price rise may squeeze profits.
- Workers — if a market grows, firms may hire more workers; if it shrinks, jobs may be lost.
Worked example
A poor harvest reduces the supply of coffee (supply shifts left). At the old price there is a shortage, so the price rises and the quantity traded falls. Consumers pay more; growers with surviving crops may earn more if demand is inelastic; workers in coffee processing may face less work as volumes fall.
Common exam mistakes
- Forgetting to relabel the new equilibrium price and quantity.
- Shifting the wrong curve for the event described.
- Giving only the price effect and ignoring quantity (or vice versa).
Exam technique
Follow four steps: (1) identify the curve that shifts and why, (2) shift it and label S1→S2 or D1→D2, (3) state the new price and quantity, (4) explain the effect on the groups the question asks about.
Quick revision
- D right → P↑ Q↑; D left → P↓ Q↓.
- S right → P↓ Q↑; S left → P↑ Q↓.