Causes of a Price Change | A-Level Economics Model Paragraph

Explain two causes of a change in price

One factor that could cause an increase in the price of tea is an increase in the price of coffee. Demand is the number of goods and services that people are willing and able to buy at each given price. If demand for tea increases, then the price of tea would also increase. One factor that can cause demand for tea to shift to the right is if the price of coffee increases. Tea and coffee are substitute goods, which means they have a positive XED (cross elasticity of demand). If the price of coffee increases, many consumers would consider switching to tea as they see it as a close substitute. That would mean that there is an increase in the quantity of tea that people are now willing and able to buy. The diagram below shows a right shift in demand. This leads to an extension in supply and an increase in the price of tea from p1 to p2.

The price of tea could also increase is a left shift in the supply curve for tea. Supply is the quantity of goods and services that firms are willing and able to sell at each price. Supply could decrease due to a decrease in productivity. Productivity can be measured as output per worker per hour. If workers are slower, or they are working with older machinery, then supply would shift to the left. This is because there would be an decrease in the quantity of milk that firms are willing and able to produce at each given price. This left shift in supply would cause a contraction in demand and an increase in the equilibrium price of tea to increase from p1 to p2.

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