Price changes
- IGCSE Economics
- Theme 2: The allocation of resources
Speaker notes: Introduce the topic and its relevance to the syllabus.
Learning objectives
- Identify the causes of price changes
- Analyse the consequences of price changes
- Understand how price changes affect markets and consumers
Speaker notes: Outline what students will learn by the end of the lesson.
Starter
- Imagine the price of smartphones suddenly doubles. What might have caused this change and how would it affect you?
Speaker notes: Encourage students to think about real-world examples of price changes and their impact.
Causes of price changes: Supply and demand
- Increase in demand
- Decrease in supply
- Changes in consumer tastes
- Government policies
Diagram explained
The vertical axis shows price and the horizontal axis shows quantity. The original demand curve and the supply curve meet at the initial equilibrium. An increase in demand shifts the demand curve to the right. The supply curve does not move, so the new equilibrium is at a higher price and a higher quantity.
- Start at the original equilibrium where demand and supply meet
- Demand shifts right because consumers want more at every price
- The new equilibrium has a higher price and a higher quantity
Speaker notes: Explain how changes in supply and demand can lead to price changes, using examples.
Causes of price changes: Costs
- Increase in production costs
- Technological advancements
- Changes in wages
Diagram explained
The vertical axis shows the price level and the horizontal axis shows real GDP. Aggregate demand and short-run aggregate supply meet at the initial equilibrium. A rise in production costs shifts short-run aggregate supply to the left. With aggregate demand unchanged, the new equilibrium has a higher price level and lower real GDP.
- Start at the original equilibrium of AD and SRAS
- Higher costs shift SRAS left
- The new equilibrium shows a higher price level and lower real GDP
Speaker notes: Discuss how changes in production costs can affect prices, using examples.
Consequences of price changes: Consumers
- Change in quantity demanded
- Substitution to other goods
- Change in consumer spending
Speaker notes: Explain how price changes can affect consumer behaviour and spending patterns.
Consequences of price changes: Producers
- Change in quantity supplied
- Change in production decisions
- Change in profits
Speaker notes: Discuss how price changes can affect producers' decisions and profits.
Consequences of price changes: Market equilibrium
- Shift in demand or supply curve
- New equilibrium price and quantity
- Market adjustment process
Speaker notes: Explain how price changes can affect market equilibrium and the adjustment process.
Consequences of price changes: Inflation and deflation
- General rise in prices (inflation)
- General fall in prices (deflation)
- Effects on economy
Diagram explained
The vertical axis shows the price level and the horizontal axis shows real GDP. Aggregate demand and short-run aggregate supply meet at the initial equilibrium. An increase in aggregate demand shifts the AD curve to the right. Short-run aggregate supply is unchanged, so the new equilibrium has a higher price level and higher real GDP.
- Start at the original equilibrium of AD and SRAS
- AD shifts right as spending rises
- The new equilibrium has a higher price level and higher real GDP
Speaker notes: Discuss the concepts of inflation and deflation and their effects on the economy.
Worked example
- Scenario: The price of coffee increases due to a drought in coffee-producing regions.
- Step 1: Identify the cause of the price change (decrease in supply)
- Step 2: Analyse the consequences for consumers (less coffee consumption, substitution to tea)
- Step 3: Analyse the consequences for producers (higher profits, possible increase in production)
Diagram explained
The vertical axis shows the price of coffee and the horizontal axis shows the quantity of coffee. The demand curve and the original supply curve meet at the initial equilibrium. A drought reduces supply, shifting the supply curve to the left. Demand is unchanged, so the new equilibrium is at a higher price and a lower quantity.
- Start at the original equilibrium for coffee
- The drought shifts supply left
- The new equilibrium has a higher price and a lower quantity
Speaker notes: Guide students through a worked example to reinforce learning.
Common mistakes and exam tips
- Avoid assuming that price changes always lead to higher profits for producers
- Remember to consider both the short-term and long-term consequences of price changes
- Always use real-world examples to support your answers in exams
Speaker notes: Highlight common mistakes and provide exam tips to help students avoid them.
Key terms
- Price change
- Supply and demand
- Market equilibrium
- Inflation
- Deflation
Speaker notes: Review key terms and their definitions to ensure understanding.
Plenary: Quick-check questions
- What are the main causes of price changes?
- How do price changes affect consumers?
- How do price changes affect producers?
- What is the difference between inflation and deflation?
Speaker notes: Ask students to answer these questions to check their understanding.
Plenary: Summary
- Price changes are caused by shifts in supply and demand, changes in costs, and government policies.
Speaker notes: Summarise the key points of the lesson.