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Supply and demand

Supply and demand is the model that explains how a market sets a price. It's the first thing you learn in microeconomics and the tool you'll reach for again and again.

The two curves

The demand curve slopes down: as price falls, buyers want more. The supply curve slopes up: as price rises, sellers offer more. Plot both on the same graph, with price on the vertical axis and quantity on the horizontal, and they cross at one point.

Equilibrium

That crossing point is the equilibrium — the single price where the quantity buyers want equals the quantity sellers offer. At any higher price there's a surplus (unsold goods push price down); at any lower price there's a shortage (eager buyers bid price up). The market naturally gravitates back to equilibrium.

What shifts a curve

A change in price moves you along a curve. Everything else shifts the whole curve:

• Demand shifts with income, tastes, prices of related goods, expectations, and the number of buyers.
• Supply shifts with input costs, technology, taxes and subsidies, and the number of sellers.

When a curve shifts, the equilibrium moves to a new price and quantity. Learning to predict that move is the whole game — and it's where most exam questions live.

Common exam traps

• Confusing a shift of a curve with a movement along it.
• Shifting both curves and forgetting that either price or quantity becomes ambiguous.
• Assuming a price cap or floor removes the shortage or surplus — it usually creates one.

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