The particular distinction, to which attention has been called, is important.  The reader who has grasped it clearly will be able to perceive many instances of the confusion arising out of its neglect in the ordinary discussions of economic questions which take place in the press and on the platform.  It is not uncommon, for instance, for an argument to run something like this:  “The effect of a tax on this commodity might seem at first sight to be an advance in price.  But an advance in price will diminish the demand; and a reduced demand will send the price down again.  It is not certain, therefore, after all, that the tax will really raise the price.”  A glance at the diagram will keep us out of such a bog of sophistry and muddle.  For if we suppose the amount of the tax per unit of the commodity to be represented by S_s_, the curve ss’ (drawn, as it is, roughly parallel to SS’) will represent the new conditions of supply after the tax has been imposed.  The new position of equilibrium will be given by the point P’, where ss’ cuts DD’, the demand curve.  Now P’ lies to the left of P the old point of equilibrium; hence, since DD’ must slope downwards from left to right, it is clear that, if, as it is fair here to assume, the conditions of demand have remained unaltered, the new price P’M’, must be greater than the old.

Sec.4. Reactions of Changes in Demand and Supply on Price.  Having now made clear the meaning that must be attached to the terms, let us consider the question which naturally arises, whether we can lay down any general propositions or laws as to the effect upon price, of an increase or decrease in demand or supply.  Another glance at the diagram suggests that we can.  An increase in demand is represented in Fig. 2 by a movement from DD’ to dd’, which cuts the supply curve, SS’, at p, to the right of P. Since the supply curve (drawn, as it is best to draw it, to represent the amount which will be supplied in response to a given price) must always slope upwards from left to right, the new price, pm, must be greater than the old, PM.  Conversely a decrease in demand is represented by a movement from dd’ to DD’, and the new price is seen to be less than the old.  We have already seen that a decrease in supply, which is represented by a movement from SS’ to ss’ results in a higher price; and it is the obvious converse that an increase in supply will have the opposite effect.  It would seem then that we might lay down quite generally that an increase in demand or a decrease in supply will raise the price while a decrease in demand or an increase in supply will lower it.