What is Supply and Demand?
Supply and demand is the economic model that explains how the price and quantity of a good are set in a competitive market. As price rises, buyers demand less and sellers supply more — the point where the two curves meet is the market equilibrium.
The law of supply and demand states that a good's market price settles where the quantity buyers demand equals the quantity sellers supply — the equilibrium point.
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Step-by-step worked examples
Demand is Qd = 80 − 0.8P and supply is Qs = 0.8P. Find the equilibrium price and quantity.
Set Qd = Qs: 80 − 0.8P = 0.8P 80 = 1.6P → P = $50 Q = 0.8 × 50 = 40 units
A drought cuts wheat supply, shifting the supply curve left with demand unchanged. What happens to price and quantity?
Supply falls at every price level At the old equilibrium price, quantity supplied is now below quantity demanded → a shortage Price rises until a new, higher equilibrium price is reached, at a lower equilibrium quantity
Demand is Qd = 100 − P and supply is Qs = 20 + P. Find equilibrium price and quantity.
Set Qd = Qs: 100 − P = 20 + P 80 = 2P → P = $40 Q = 20 + 40 = 60 units
Flashcards
Quick quiz
Q1.At market equilibrium:
Q2.If demand increases while supply stays the same, equilibrium price will:
Q3.A price set below equilibrium typically causes a:
Q4.The demand curve is typically:
The full card deck, worked steps and AI-tutor support for “What is Supply and Demand?” are in Notek — study by hand before your exam.
Common mistakes
Thinking higher demand always means higher price forever. — Correct: Price rises only until a new equilibrium is reached; supply usually responds too.
Confusing a 'change in quantity demanded' (movement along the curve) with a 'change in demand' (a shift of the curve). — Correct: Price changes move along the curve; changes in income, tastes or related goods shift the whole curve.
Assuming supply and demand curves are always straight lines in reality. — Correct: Linear curves are a simplification for teaching — real curves can be nonlinear.
Ignoring that price ceilings/floors can prevent equilibrium. — Correct: A binding price ceiling below equilibrium causes a shortage; a binding floor above it causes a surplus.
FAQ
What is the law of supply and demand?
It states that in a competitive market, price adjusts until the quantity demanded equals the quantity supplied — the equilibrium.
What is the supply and demand formula?
Equilibrium is found by setting the demand function equal to the supply function: Qd(P) = Qs(P), then solving for P.
What are examples of supply and demand?
A drought reducing wheat supply, a viral product spiking demand, or a price ceiling causing a housing shortage are all supply-and-demand examples.
How do you calculate the equilibrium price?
Set the demand equation equal to the supply equation and solve for price P; then plug P back in to find equilibrium quantity.