Price Theory: Demand, Supply and Market Equilibrium
Price theory tests how demand and supply interact to set equilibrium price and quantity, and how shifts and government controls change that equilibrium. The exam expects diagrams described in words, correct use of 'movement along' versus 'shift', and clear numerical equilibrium.
Demand and supply
The law of demand says price and quantity demanded are inversely related, other things equal. Demand shifts with income, tastes, population, expectations and prices of substitutes or complements. A change in the good's own price causes a movement along the demand curve, not a shift. The law of supply says price and quantity supplied are directly related. Supply shifts with input costs, technology, taxes, subsidies, weather and the number of sellers.
Equilibrium and the price mechanism
Equilibrium is where quantity demanded equals quantity supplied. Above equilibrium there is a surplus, which pushes price down; below equilibrium there is a shortage, which pushes price up. An increase in demand raises both equilibrium price and quantity. An increase in supply lowers price and raises quantity. If both curves shift, one of price or quantity may be indeterminate without more information.
Controls and interventions
A maximum price (ceiling) set below equilibrium creates a shortage, queues and black markets. A minimum price (floor) set above equilibrium creates a surplus, so the state may buy the excess. A subsidy shifts supply right, lowering price and raising quantity.
Worked example
In a Douala market, demand is Qd = 120 − 2P and supply is Qs = 20 + 3P, with price in hundreds of CFA and quantity in bags. Set Qd = Qs: 120 − 2P = 20 + 3P, so 100 = 5P and P = 20. Quantity is 120 − 40 = 80 bags. If the government fixes a maximum price of 15, Qd = 90 and Qs = 65, creating a shortage of 25 bags. If incomes rise so demand becomes Qd = 140 − 2P, equilibrium is 140 − 2P = 20 + 3P, giving P = 24 and Q = 92.
Traps that cost marks
Do not shift demand when the good's own price changes; do not say a price ceiling always binds; do not confuse demand with quantity demanded; and do not claim equilibrium is automatically fair or socially optimal. Label axes and shift directions correctly in diagrams.