What is Supply and Demand?
Supply and demand is the economic model describing how the price of a good is set by the interaction between how much producers are willing to sell (supply) and how much consumers want to buy (demand). Where the two curves meet is the market equilibrium.
Demand is the quantity buyers want at each price (falls as price rises); supply is the quantity sellers offer at each price (rises as price rises). The market settles at the equilibrium price where quantity demanded equals quantity supplied.
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Step-by-step worked examples
Demand: Qd = 100 − 4P. Supply: Qs = 10 + 6P. Find the equilibrium price and quantity.
Set Qd = Qs: 100 − 4P = 10 + 6P 100 − 10 = 6P + 4P 90 = 10P → P* = 9 Q* = 10 + 6(9) = 64 Equilibrium: price $9, quantity 64 units
At $5, quantity demanded is 80 and quantity supplied is 40. What happens to price?
Quantity demanded (80) > quantity supplied (40) → shortage of 40 units Buyers compete for scarce goods, bidding price up Price rises toward equilibrium, closing the gap
A frost destroys half the coffee crop (supply shifts left). How does the equilibrium price change if demand is unchanged?
Supply curve shifts left (less quantity offered at every price) At the old equilibrium price, quantity demanded now exceeds quantity supplied New equilibrium: higher price, lower quantity traded
Flashcards
Quick quiz
Q1.If Qd = 100 − 4P and Qs = 10 + 6P, what is the equilibrium price?
Q2.What happens to equilibrium price when demand increases (curve shifts right) with supply unchanged?
Q3.At a price above equilibrium, what typically results?
Q4.Which best describes the law of supply?
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Common mistakes
Thinking a 'change in demand' and a 'change in quantity demanded' are the same thing. — Correct: A price change moves along the demand curve (quantity demanded); a shift in income/preferences moves the whole curve (change in demand).
Assuming equilibrium price is always 'fair' or fixed forever. — Correct: Equilibrium simply balances quantity supplied and demanded at a moment in time — it shifts whenever supply or demand curves shift.
Believing higher demand always means higher price with no quantity effect. — Correct: A demand increase raises both equilibrium price AND equilibrium quantity, assuming supply is unchanged.
Confusing supply and demand curve slopes. — Correct: Demand slopes downward (price ↑, quantity ↓); supply slopes upward (price ↑, quantity ↑).
FAQ
What is supply and demand?
It's the economic model where price is determined by the balance between how much sellers offer (supply) and how much buyers want (demand).
What is the formula for supply and demand equilibrium?
Set Qd = Qs and solve for P. With linear curves Qd = a − bP and Qs = c + dP, the equilibrium price is P* = (a − c)/(b + d).
What are examples of supply and demand?
A frost cutting coffee supply raising coffee prices, or a new smartphone launch spiking demand and driving up its price before supply catches up.
How do you calculate the equilibrium price?
Set the demand function equal to the supply function (Qd = Qs) and solve algebraically for price P, then plug it back in to find equilibrium quantity.