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Why did the price change? Demand or supply?

Almost every micro question about a price move comes down to one detective question: which curve moved? Read the clues, name the culprit, then predict price and quantity.

Read the clues

Look at what happened to price and quantity together. If they move the same way, demand moved. If they move in opposite directions, supply moved.

What shifts demand

• Income: more income raises demand for normal goods and lowers it for inferior goods.
• Tastes and preferences.
• Prices of related goods: a higher price for a substitute raises demand; a higher price for a complement lowers it.
• Expectations about future prices or income.
• Number of buyers.

What shifts supply

• Input costs such as wages, materials and energy.
• Technology.
• Taxes and subsidies.
• Expectations and the number of sellers.
• Natural events such as frost, floods or disease.

A change in the good's own price is never a shifter. It moves you along the curve.

A worked case

Coffee prices jump and cafés sell less coffee. The suspects are a viral ad campaign (demand up), a frost that wrecks harvests (supply down), a wave of new cafés (supply up) and a recession (demand down). Price up with quantity down is the opposite-direction pattern, so supply decreased. The culprit is the frost. The ad campaign would have raised both price and quantity, and the recession would have lowered both.

Common exam traps

• Assuming a higher price always means demand rose. Check quantity too.
• Treating the good's own price as a shifter instead of a movement along the curve.
• Reversing the substitute and complement rules.

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