Studyledge

Market Equilibrium and Price Changes: Question 4

Syllabus 2.4, 2.5

Structured 6 marks

A coastal town experiences an unusually long heatwave, and local news channels repeatedly report that the hot weather will continue for several more weeks. As a result, considerably more residents and tourists want to buy sunglasses at every possible price than before. Meanwhile, the cost of producing sunglasses, the number of sunglasses manufacturers in the town, and every other influence on the supply of sunglasses remain exactly the same.

(a) Explain whether this event causes a shift of the demand curve for sunglasses or a movement along it. State the direction of any shift. [3]

(b) Describe, in words, what would happen to a demand and supply diagram for sunglasses as a result of this event, and explain the effect on the equilibrium price and equilibrium quantity of sunglasses in the town. [3]

Show worked solution Hide worked solution

Worked solution

Part (a): Shift or movement?

A movement along the demand curve only happens when the good’s own price changes, with every other influence on demand held constant. A shift of the whole demand curve happens when a non-price determinant of demand changes instead.

Here, the price of sunglasses itself has not changed at all. What has changed is a non-price factor (the weather, and expectations about how long it will last) which alters how much residents and tourists want sunglasses at every possible price. This is therefore a shift of the demand curve, not a movement along it.

Since more sunglasses are now demanded at every price than before, the demand curve shifts to the right: demand has increased.

Part (b): Effect on the diagram and on equilibrium

On a demand and supply diagram for sunglasses:

  • The demand curve shifts to the right, from its original position to a new position further out, reflecting that more sunglasses are wanted at every price.
  • The supply curve does not move, because production costs and the number of manufacturers are unchanged, the stem rules out any supply-side change.
  • The new equilibrium is where the shifted demand curve crosses the unchanged supply curve. This new crossing point lies above and to the right of the original equilibrium point.

Because the new intersection is higher up and further right on the diagram than the old one:

  • The equilibrium price of sunglasses rises, since buyers are now willing to pay more at every quantity, and manufacturers require a higher price to be willing to supply extra sunglasses.
  • The equilibrium quantity of sunglasses rises, as manufacturers respond to the higher price by extending output along their unchanged supply curve.

Final answers

  • (a) This is a shift of the demand curve (to the right. Demand increases), not a movement along it, since a non-price factor (weather/tastes) has changed, not the price of sunglasses.
  • (b) The demand curve shifts right while the supply curve stays fixed; the new equilibrium lies above and to the right of the original one, so both equilibrium price and equilibrium quantity rise.