James d. Gwartney

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Sacrificing Lives for Profits by Dwight Lee
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Pencil and Price System

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33
Exhibit 3 illustrates the impact of an increase in demand on the market price of a good.
Suppose there is an increase in consumers’ income or a rise in the price of frozen yogurt, a
common substitute for ice cream. These changes will increase the demand for ice cream at all
prices, causing the demand curve to shift to the right from D1 to D2. In turn, the stronger
demand will push the equilibrium price of ice cream upward from GEL 5 to GEL 7. At the
new higher equilibrium price, the quantity demanded by consumers will once again be brought
into balance with the quantity supplied by producers. Note, the increase in demand (shift in the
entire demand curve) will result in an increase in the quantity supplied from 15 thousand to 20
thousand, a movement along the existing supply curve.
A reduction in consumer income or lower frozen yogurt prices would exert the opposite
impact. These changes would reduce the demand for ice cream (shift the demand curve to the
left), lower the price, and reduce the equilibrium quantity exchanged.

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34
Exhibit 3: An Increase in Demand Leads to a Higher Price
D2
S
E1
E2
Quantity (thousands of liters of ice cream)
D1
P1
P2
Q1
Q2
P
ri
c
e
 (
G
E
L
 p
e
r 
u
n
it
)
5
7.5 10 12.5 15 17.5 20 22.5 25 27.5 30 32.5
0
1
2
3
4
5
6
7
8
9
10