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Supply and Demand

Two curves that set nearly every price you'll ever pay. Learn how supply and demand work, what shifts them, and how markets find equilibrium.

  • Explain the laws of supply and demand
  • Draw and interpret supply and demand diagrams
  • Explain what shifts each curve
  • Describe how equilibrium price is set

The two laws

Demand is how much of a good consumers want to buy at each price. The law of demand: as price falls, quantity demanded rises (and vice versa) — things sell more when they're cheaper.

Supply is how much producers will sell at each price. The law of supply: as price rises, quantity supplied rises — higher prices make production more worthwhile.

Definition: equilibrium

Equilibrium is the price where quantity demanded equals quantity supplied. At this price the market clears — everything produced is bought, with no shortage or surplus.

pricequantitysupplydemandQ*P*
Where the curves cross is equilibrium: one price, one quantity, market cleared.

Shifts vs movements

This distinction earns marks:

  • Movement along a curve happens when price changes (e.g. cheaper → more demanded).
  • Shift of the whole curve happens when something other than price changes.

Demand shifts when: incomes change, tastes/fashion change, advertising works, prices of substitutes or complements change, population changes.

Supply shifts when: costs of production change (wages, raw materials), technology improves, taxes or subsidies change, or the number of sellers changes.

Worked example

A heatwave hits. What happens to the market for ice cream?

Demand shifts right (hotter weather → more wanted at every price). The new equilibrium has a higher price and higher quantity. Short version: demand up → price up.

Common mistake

A rise in price does not shift the demand curve — it causes a movement along it (a contraction of demand). Only non-price factors shift curves. Say the right word.

Practice

Coffee becomes fashionable. What happens to demand, price and quantity?
Is this a movement or a shift?

Demand shifts right → equilibrium price rises, quantity rises.

A new robot halves the cost of making bicycles. What shifts, and what happens to price?
Whose costs changed — buyers' or sellers'?

Supply shifts right (cheaper production) → equilibrium price falls, quantity rises.

Quick check

Supply and demand — quick check

The law of demand says…

Price and quantity demanded move in opposite directions.

A rise in consumer incomes shifts the demand curve for normal goods…

Higher incomes mean more demanded at every price — the whole curve shifts right.

At equilibrium…

Equilibrium is where the curves cross: the market clears.
Key takeaways
  • Law of demand: price down → quantity demanded up. Law of supply: price up → quantity supplied up.
  • Equilibrium: where the curves cross; the market clears.
  • Price changes cause movements along curves; other factors shift curves.
  • Demand shifters: income, tastes, substitutes/complements. Supply shifters: costs, technology, taxes.
Market Equilibrium →Back to Grade 8 chaptersRelated resources →