Returning to determinants of supply and demand

External factors such as the determinants of demand and supply cause the curves to move and intersect elsewhere. This causes a change to the point of equilibrium because increases or decreases of profits either attract or repel suppliers from the market. Watch the video to find out how.

The content from the video is also below, if you want to work through it at your own pace.

Increasing demand

Imagine a hot spell of sunny weather increases the demand for trips to the coast. An increase in demand moves the demand curve to the right.

This results in a price increase from £2 to £2.50 and an increase in journeys to the coast from seven to 10. The demand curve moves to the right, creating a new equilibrium.

Reducing supply

Now consider the effect of an earthquake on the supply of transport, which will reduce supply and move the supply curve to the left.

With less transport, the resulting price will rise from £2 to £2.50 and there will be a reduction in the number of journeys sold, in this instance from seven to four journeys. The supply curve moves to the left, creating a new equilibrium.

However, the story doesn’t end there. The increase in price will attract more suppliers interested in the extra profits, which will increase supply again, reduce price and move the supply curve back to the initial equilibrium point.

To conclude, demand and supply react in a market based on changes in price, which always move along the supply and demand curves, and by the determinants of demand and supply that shift the curves left or right.

By recognising these movements, suppliers and producers can allocate or withdraw scarce resources, depending on what the market requires. Remember, this is a basic outline of the mechanisms of a market and is dependent on many suppliers and buyers, easy entry and exit to the market, and perfect information.

Your task

Using your understanding of supply and demand concepts and what makes either curve move or change equilibrium, how can governments assist the market to achieve the aim of increasing the demand and supply of rail services?

Discuss this in the comments area in preparation for the next step.