2.1 Demand and supply curves
- Syllabus
- 9708–2026–2027
- Topic
- 2.1
- Level
- AS
Learning objectives
2.1.1Effective demand• Effective demand2.1.2Individual and market demand/supply• Individual and market demand and supply2.1.3Demand determinants• Determinants of demand2.1.4Supply determinants• Determinants of supply2.1.5Demand curve shifts• Causes of a shift in the demand curve (D)2.1.6Supply curve shifts• Causes of a shift in the supply curve (S)2.1.7Shifts vs movements• Distinction between the shift in the demand or supply curve and the movement along these curves
Effective demand is willingness and ability to buy at a stated price
Effective demand is the quantity of a good or service consumers are willing and able to purchase at a particular price and time. Desire alone is not demand if purchasing power or access is absent.
A demand schedule links price to quantities demanded, holding other relevant factors constant. Income, expectations, tastes and related-good prices can change demand at every price.
A student may want a laptop but becomes an effective demander only when they can pay or obtain finance at the stated price.
A social-media wish list measures desire, not necessarily effective demand; ability to pay and a chosen price matter.
Individual demand and supply combine to form market curves
An individual demand curve shows one consumer’s quantities demanded at different prices; a market demand curve sums the quantities demanded by all consumers at each price. The same horizontal summation applies to supply.
Market curves depend on the number and characteristics of buyers or sellers. A change in the population or firms can change the market curve even if each individual curve is unchanged.
At £2, three consumers demand 2, 1 and 4 units, so market demand is 7 units at £2.
Do not add prices vertically for ordinary market demand and supply; add quantities at the same price.
What determines demand?
Demand depends on the good's own price and on conditions that change consumers' willingness or ability to buy. The direction of an effect must follow the economic relationship, not a memorised keyword.
| Determinant changes | Demand mechanism |
|---|---|
| Own price falls | Quantity demanded normally rises, other conditions unchanged |
| Income rises | Demand rises for a normal good but falls for an inferior good |
| Price of a substitute rises | Consumers switch toward this good, raising its demand |
| Price of a complement rises | Joint consumption becomes dearer, reducing this good's demand |
| Tastes become more favourable | More is wanted at given prices |
| Expected future price rises | Current demand may rise as purchases are brought forward |
| Number of buyers rises | Market demand increases because more individual demands are summed |
A related good must first be identified as a substitute or complement, and the income effect depends on whether the good is normal or inferior. Without that classification, the direction is not determined.
What determines supply?
Supply depends on the good's own price and on conditions that change producers' expected profitability or productive capacity. The time period matters because some inputs and capacity take time to adjust.
| Determinant changes | Supply mechanism |
|---|---|
| Own price rises | Quantity supplied normally rises, other conditions unchanged |
| Input costs or indirect taxes rise | Profitability at given output prices falls |
| Subsidy rises | Effective production cost falls |
| Technology or productivity improves | More output can be produced from available inputs |
| Price of an alternative product rises | Producers may redirect resources toward the alternative |
| Expected future price rises | Producers may withhold stock now when storage is possible |
| Number of firms rises | Market supply includes more individual suppliers |
| Weather, infrastructure or institutions improve | Agricultural or other productive capacity may increase |
The same word does not guarantee the same effect in every context. For example, better weather may raise crop supply, while an expected future price rise affects current supply only when output can be delayed or stored.
How to determine a demand-curve shift
A demand curve shifts when a non-price determinant changes quantity demanded at every possible price. A right shift means greater demand; a left shift means lower demand.
- Hold the good's own price constant. 2. Identify how the changed condition affects willingness or ability to buy. 3. Decide whether quantity demanded is greater or smaller at each price, then shift the whole curve right or left.
| Change | Demand shift | Reason |
|---|---|---|
| Income rises for a normal good | Right | Purchasing ability rises |
| Price of a substitute falls | Left | Buyers switch toward the cheaper substitute |
| Price of a complement falls | Right | Joint consumption becomes cheaper |
| Product receives persistently bad reviews | Left | Tastes become less favourable |
| More buyers enter the market | Right | More individual demands are aggregated |
A lower own price does not shift demand: it changes quantity demanded on the existing curve. A shift always changes the full price-quantity relationship.
How to determine a supply-curve shift
A supply curve shifts when a non-price condition changes quantity supplied at every possible price. A right shift means greater supply; a left shift means lower supply.
- Hold the product's own price constant. 2. Identify how the change affects cost, expected profitability or productive capacity. 3. Decide whether firms offer more or less at each price, then shift the whole curve right or left.
| Change | Supply shift | Reason |
|---|---|---|
| Input cost rises | Left | Production is less profitable at each output price |
| Productivity improves | Right | More output can be produced from available inputs |
| Per-unit subsidy rises | Right | Effective cost falls |
| Poor harvest reduces crops | Left | Productive capacity falls |
| More firms enter the industry | Right | More individual supplies are aggregated |
A higher own price does not shift supply: it changes quantity supplied on the existing curve. A discount chosen by sellers is also a price change, not automatically evidence that supply shifted.
Movement along a curve or shift of the curve?
| Feature | Movement along demand or supply | Shift of demand or supply |
|---|---|---|
| Cause | Change in the product's own price | Change in any other determinant |
| Graph action | Choose another point on the same curve | Move the entire curve right or left |
| Demand language | Extension or contraction of demand; change in quantity demanded | Increase or decrease in demand |
| Supply language | Extension or contraction of supply; change in quantity supplied | Increase or decrease in supply |
| What changes at a fixed own price? | Nothing: the curve is unchanged | Quantity demanded or supplied changes at every price |
For coffee, a fall in coffee's own price causes an extension of demand along the existing demand curve. A rise in the price of tea, a substitute, increases demand for coffee and shifts its demand curve right. The same test applies to supply: own price gives movement; costs, technology or other production conditions give shifts.
First identify which price changed. A change in a substitute, complement or input price is not the product's own price, so it can shift the relevant curve.