Demand, Supply, and Market Equilibrium
Core concepts
A demand curve shows the quantity buyers will purchase at each price, holding other factors constant. The law of demand says quantity demanded falls as price rises, producing a downward slope. A change in price moves along the curve (change in quantity demanded); a change in income, tastes, prices of related goods, expectations, or number of buyers shifts the whole curve. For supply, price changes cause movements along the curve, while input costs, technology, taxes, subsidies, and seller numbers shift it. Normal goods see demand rise with income; inferior goods see demand fall. Substitutes have positive cross-price effects; complements have negative ones.
Traps to watch
- Mixing up a shift of the curve with a movement along it.
- Predicting both price and quantity when only one curve shifts - you can determine both only with one shift; with two simultaneous shifts one variable is indeterminate.
- Confusing a price ceiling (binding only below equilibrium, causing shortage) with a price floor (binding only above equilibrium, causing surplus).
Worked example
Equilibrium is $10 and 100 units. A new tax raises sellers' costs, shifting supply left. Demand is unchanged, so equilibrium price rises and quantity falls. Rule of thumb: identify which curve moves first, then read the new intersection; a leftward supply shift raises price and lowers quantity.