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Market Equilibrium and Price Changes: Question 8

Syllabus 2.5

Multiple choice 1 mark

A convenience store sells a well-known brand of sugary soda. A national health advisory warns of the risks of high sugar intake, and a widely-reported campaign encourages people to drink less sugary soda. As a result, considerably fewer customers want to buy this soda at every possible price than before. Meanwhile, the store's production and delivery costs, and every other influence on the supply of this soda, remain exactly the same.

What happens to the equilibrium price and equilibrium quantity of this soda at the store as a result of the health advisory?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Decide whether this is a shift or a 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 the soda itself has not changed. What has changed is a non-price factor (health-related tastes and preferences, following the advisory and campaign) which reduces how much soda customers want to buy at every possible price. This is therefore a shift of the demand curve, not a movement along it.

Step 2: Find the direction of the shift

Since fewer sodas are now demanded at every price than before, the demand curve shifts to the left: demand has decreased.

Step 3: Work out the effect on equilibrium

The supply curve does not move, because the stem states that production and delivery costs, and every other influence on supply, are unchanged. The new equilibrium is where the shifted (leftward) demand curve crosses the unchanged supply curve. This new crossing point lies below and to the left of the original equilibrium point.

Because the new intersection is lower down and further left on the diagram than the old one:

  • The equilibrium price of the soda falls, since buyers are now willing to pay less at every quantity.
  • The equilibrium quantity of the soda falls, as the store responds to the lower price by contracting output along its unchanged supply curve.

Step 4: Rule out the other options

  • Options A, C and D all involve either price or quantity rising, but a leftward shift of demand with an unchanged supply curve moves the equilibrium point down and to the left, so both price and quantity must fall together.

Final answer

Equilibrium price falls and equilibrium quantity falls, option B.