Economics, 3rd Edition

What Happens to Price and Quantity When Demand or Supply Shifts?

As a test, make sure you can explain each of the entries in this table using a supply and demand diagram.

TABLE 3.3

No change in supply

An increase in supply

A decrease in supply

No change in demand

P same

Q same

P down

Q up

P up

Q down

An increase in demand

P up

Q up

P ambiguous

Q up

P up

Q ambiguous

A decrease in demand

P down

Q down

P down

Q ambiguous

P ambiguous

Q down

SELF TEST 

Analyse what happens to the market for pizza if the price of tomatoes rises.

Analyse what happens to the market for pasta if the price of potatoes falls.

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68  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK

Markets in Action

We have seen how we can use supply and demand analysis to begin to understand markets. 

The real world has examples of markets in action every day. This article highlights an 

example of markets in action.

The Market for Cotton

Cotton is a commodity – a tradable 

product – which is used in textiles and 

clothing manufacture in partic 

ular, 

but is also used in the produ c tion  of 

other products such as nets and fil-

ters. There are different qualities of 

cotton but it is reasonably homogen-

ous. There are around 90 countries 

in the world that produce cotton but 

the United States, China and India 

account for around half the world’s 

supply. There are thousands of cotton 

farmers and large numbers of buyers, 

and cotton is traded on organized 

commodity markets to bring together 

buyers and sellers of cotton.

Changes in the price of cotton 

present an excellent way to see how 

markets work in real life. The price 

of cotton responds to the changes 

in demand for the commodity and 

to changes in supply. The supply of 

cotton can be dependent on factors 

such as the weather but also on 

the expectations of farmers about 

the future price of cotton which 

may influence how much land they 

devote to planting cotton.

What might account for these 

changes in prices? One of the main 

reasons was changes in the supply 

of cotton. In the years to 2010, cotton 

growers had faced increasing chal-

lenges making cotton farming profit-

able. The amount of land given over 

to growing cotton had declined and 

so supplies of cotton had been relat-

ively low. In 2010, the weather also 

played a part in damaging crops and 

as a result there was a shortage of 

cotton and this accounted for the rise 

in price up to March 2011. How might