Supply and Demand
The supply and demand model explains how prices and quantities are determined in a competitive market. Demand shows the quantity buyers are willing and able to purchase at each price, supply shows the quantity firms are willing and able to offer, and the intersection of the two curves establishes the market equilibrium price and quantity.
- Law of Demand
- All else being equal (ceteris paribus), as the price of a good rises, the quantity demanded falls, and as the price falls, the quantity demanded rises. This inverse relationship gives the demand curve its downward slope.
- Law of Supply
- All else being equal, as the price of a good rises, the quantity supplied rises, and as the price falls, the quantity supplied falls. This positive relationship gives the supply curve its upward slope, because higher prices make production more profitable.
- Market Equilibrium
- The point where the demand and supply curves intersect, so the quantity demanded equals the quantity supplied. This determines the equilibrium price and equilibrium quantity, and in a free market prices tend to move toward it.
Supply and Demand: Supply, Demand, Elasticity & Welfare Shift Lab
Trigger a market shock or adjust price elasticity below to watch the curves shift and inspect the new equilibrium price, output, and welfare triangles.
Baseline Free-Market Equilibrium
Market clears at P₁, Q₁ where Quantity Demanded equals Quantity Supplied (allocative efficiency; social welfare is maximised).
Key Concepts & Exam Definitions (5)
- Law of Demand
- All else being equal (ceteris paribus), as the price of a good rises, the quantity demanded falls, and as the price falls, the quantity demanded rises. This inverse relationship gives the demand curve its downward slope.
- Law of Supply
- All else being equal, as the price of a good rises, the quantity supplied rises, and as the price falls, the quantity supplied falls. This positive relationship gives the supply curve its upward slope, because higher prices make production more profitable.
- Market Equilibrium
- The point where the demand and supply curves intersect, so the quantity demanded equals the quantity supplied. This determines the equilibrium price and equilibrium quantity, and in a free market prices tend to move toward it.
- Shift vs. Movement Along a Curve
- A change in the good's own price causes a movement along a curve (a change in quantity demanded or supplied). A change in a non-price factor (such as income or input costs) shifts the whole curve (a change in demand or supply).
- Price Elasticity of Demand (PED)
- A measure of how responsive quantity demanded is to a change in price, calculated as the percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when |PED| > 1 and inelastic when |PED| < 1.
Quick-Fire Flashcards (5)
Click any card to check the answer, then mark it as Known to track your progress.
What does the law of demand state?
What is the difference between a shift of the demand curve and a movement along it?
What is a shortage (excess demand), and how does the market respond?
What are the main non-price determinants of demand?
How is price elasticity of demand calculated, and what makes demand elastic vs. inelastic?
Exam-Style Questions & Mark Schemes (3)
Write or think through your answer first, then click Check Mark Scheme to see the exact points examiners award marks for.
- Q1
The price of coffee rises while everything else stays the same. What happens to the quantity of coffee demanded, and is this a shift of the demand curve or a movement along it?
Click “Check Mark Scheme” to compare your answer, Quantity demanded falls. Because the change is caused by the good's own price, it is a movement along the demand curve (a change in quantity demanded), not a shift. The curve only shifts when a non-price factor changes.
- Q2
A bad harvest sharply reduces the supply of wheat. Using the supply-and-demand model, what happens to the equilibrium price and equilibrium quantity of wheat?
Click “Check Mark Scheme” to compare your answer, The supply curve shifts to the left (supply decreases). At the original price there is now excess demand, so the equilibrium price rises and the equilibrium quantity falls. Demand does not shift; there is only a movement along the demand curve to the new equilibrium.
- Q3
A government sets a price ceiling (a legal maximum price) below the equilibrium price of rent. What is the likely result in the housing market?
Click “Check Mark Scheme” to compare your answer, A shortage (excess demand). Because the capped price is below equilibrium, quantity demanded exceeds quantity supplied: more people want housing than landlords will offer at that price. The price cannot legally rise to clear the market, so the shortage persists.
Common Exam Questions (3)
What is the law of supply and demand?
The law of demand states that, ceteris paribus, as the price of a good rises, quantity demanded falls. The law of supply states that as the price rises, quantity supplied rises. Market prices adjust toward the equilibrium where quantity demanded equals quantity supplied.
What is market equilibrium?
Market equilibrium is the price-quantity combination where the demand curve and supply curve intersect, so quantity demanded exactly equals quantity supplied and there is no excess demand (shortage) or excess supply (surplus).
What causes a shift in the demand curve?
A shift of the entire demand curve is caused by a change in any non-price determinant of demand: consumer incomes, tastes and fashions, prices of substitute or complementary goods, population size, or expectations of future prices. A change in the good's own price causes a movement along the existing demand curve.
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