1.1.3 Demand, supply and market equilibrium
- Syllabus
- 2026
- Topic
- 1.1.3
- Level
- —
Learning objectives
1.1.3a DemandDefinition of demand.1.1.3b Movements and shifts on demand curvesThe use of demand curve diagram to show:• changes in price causing movements along a demand curve• shifts indicating increased and decreased demand.1.1.3c Factors that shift demandExplain factors that may shift the demand curve, including advertising, income, fashion and tastes, prices of substitutes and complements, and demographic change.1.1.3d SupplyDefinition of supply.1.1.3e Movements and shifts on supply curvesThe use of supply curve diagram to show:• changes in price causing movements along a supply curve• shifts indicating increased and decreased supply.1.1.3f Factors that shift supplyExplain factors that may shift the supply curve, including production costs, technology, indirect taxes, subsidies and natural factors such as disasters and weather.1.1.3g Equilibrium price and quantity and how they are determinedEquilibrium price and quantity and how they are determined.1.1.3h Market equilibrium, excess demand and excess supply diagramsThe use of diagrams to show:• how shifts in supply and demand affect equilibrium price and quantity in real-world situations• excess demand• excess supply.1.1.3i Calculating and drawing excess demand and excess supplyDefine, calculate and draw excess demand and excess supply.1.1.3j Market forces removing excess demand or supplyThe use of market forces to remove excess supply or excess demand.
Define demand as a priced intention to buy
Demand is the quantity of a good or service that consumers are willing and able to buy at a given price over a given period of time.
| Element | Why it matters |
|---|---|
| quantity | demand is measurable in units |
| willing and able | desire alone is not demand; purchasing power is also required |
| given price | quantity demanded is linked to a particular price |
| time period | 100 units per day differs from 100 units per year |
Other things equal, a lower price normally leads to a greater quantity demanded and a higher price to a smaller quantity demanded. The demand curve therefore usually slopes downward.
Demand is the whole price–quantity relationship; quantity demanded is one amount at one price. Do not define demand as simply wanting a product.
Separate movement along demand from a demand shift
A change in the product's own price causes a movement along the existing demand curve. A non-price determinant changes demand at every price and shifts the whole curve.
| Cause | Diagram action | Economic statement |
|---|---|---|
| own price falls | move down and right along D | extension: quantity demanded rises |
| own price rises | move up and left along D | contraction: quantity demanded falls |
| non-price factor raises demand | shift D right | more is demanded at every price |
| non-price factor lowers demand | shift D left | less is demanded at every price |
Keep the axes labelled price and quantity. For a movement, mark two points on one curve; for a shift, draw and label a second curve such as D1.
Never shift demand because the product's own price changed. Price changes quantity demanded; advertising, income, tastes, related-good prices or population can change demand.
Predict the direction of a demand shift
A demand determinant shifts the curve only when it changes how much consumers are willing and able to buy at each possible price. Identify the factor, explain the consumer response, then state left or right.
| Change | Typical demand effect | Reason |
|---|---|---|
| more effective advertising or favourable fashion | right | more consumers want the product |
| income rises for a normal good | right | purchasing power increases |
| price of a substitute rises | right | consumers switch toward this product |
| price of a complement rises | left | joint consumption becomes more expensive |
| target population grows | right | more potential buyers enter the market |
| reverse of these changes | opposite shift | willingness or ability moves in the opposite direction |
The direction must fit the relationship: if bananas and apples are substitutes, cheaper bananas reduce demand for apples; if rackets and tennis balls are complements, cheaper rackets raise demand for tennis balls.
Income does not always shift every product the same way: the usual rightward result assumes a normal good. Also distinguish a related good's price, which can shift demand, from this product's own price, which causes movement along D.
Define supply as a priced intention to sell
Supply is the quantity of a good or service that producers are willing and able to offer for sale at a given price over a given period of time.
| Element | Why it matters |
|---|---|
| quantity | supply is measured in units offered for sale |
| willing and able | productive capacity without willingness, or willingness without capacity, is insufficient |
| given price | quantity supplied is tied to a particular market price |
| time period | producers can often adjust more over a longer period |
Other things equal, a higher price normally increases the reward from selling and leads to a greater quantity supplied, so the supply curve usually slopes upward.
Supply means units offered for sale, not the total stock that exists. Supply is the whole curve; quantity supplied is one amount at one price.
Separate movement along supply from a supply shift
A change in the product's own price causes movement along the existing supply curve. A non-price determinant changes supply at every price and shifts the whole curve.
| Cause | Diagram action | Economic statement |
|---|---|---|
| own price rises | move up and right along S | extension: quantity supplied rises |
| own price falls | move down and left along S | contraction: quantity supplied falls |
| non-price factor raises supply | shift S right | more is supplied at every price |
| non-price factor lowers supply | shift S left | less is supplied at every price |
Use two points on one curve to show a price movement. Use a second labelled curve, such as S1, only when production conditions change.
A higher product price does not shift supply. It changes quantity supplied along S; costs, technology, taxes, subsidies and natural factors can shift S.
Trace production changes into supply shifts
Supply shifts when a production condition changes the quantity firms can profitably offer at each price. Trace the change through unit cost or productive capacity before choosing the shift direction.
| Change | Cost/capacity route | Shift |
|---|---|---|
| production costs rise | each unit is less profitable to produce | left |
| technology or productivity improves | more output can be made from given inputs | right |
| indirect tax increases | cost per unit rises | left |
| subsidy increases | effective production cost falls | right |
| favourable weather for crops | yield and available output rise | right |
| disaster or adverse weather | capacity or yield falls | left |
A rise in raw-material costs shifts car supply left, raising equilibrium price and lowering quantity. A productivity improvement shifts smartphone supply right, lowering equilibrium price and raising quantity, assuming demand is unchanged.
Do not treat every government payment as demand. A subsidy to producers changes their costs and shifts supply; the product's own market price still causes movement along the curve.
Locate the market-clearing price and quantity
Market equilibrium occurs where quantity demanded equals quantity supplied. The intersection of D and S determines both the equilibrium price, Pe, and equilibrium quantity, Qe.
| At a candidate price | Comparison | Market condition |
|---|---|---|
| Qd = Qs | planned purchases equal planned sales | equilibrium |
| Qd > Qs | buyers want more than firms offer | excess demand |
| Qs > Qd | firms offer more than buyers want | excess supply |
Demand represents buyers' decisions and supply represents sellers' decisions. Only at their intersection are the two plans mutually consistent, so there is no pressure from unsold goods or unmet orders for price to change.
Equilibrium is not the highest price or output a firm prefers. It is the market price–quantity combination where the quantities demanded and supplied are equal.
Read shifts, shortages and surpluses on one market diagram
Begin with D and S intersecting at Pe and Qe. Shift only the curve whose determinant changed; its new intersection gives the new equilibrium price and quantity. At a controlled or non-equilibrium price, horizontal quantities reveal excess demand or supply.
| Curve change, other curve fixed | New equilibrium price | New equilibrium quantity |
|---|---|---|
| demand shifts right | higher | higher |
| demand shifts left | lower | lower |
| supply shifts right | lower | higher |
| supply shifts left | higher | lower |
At a price below equilibrium, Qd is normally greater than Qs: excess demand. At a price above equilibrium, Qs is normally greater than Qd: excess supply. Measure both quantities at the same price line.
A movement to a new equilibrium after a curve shifts includes movements along the unchanged curve. Do not shift both curves unless the context gives separate determinants for both.
Calculate and draw excess demand or excess supply
Excess demand is the amount by which quantity demanded exceeds quantity supplied at a given price. Excess supply is the amount by which quantity supplied exceeds quantity demanded at a given price.
| Condition | Calculation | Diagram |
|---|---|---|
| Qd > Qs | excess demand = Qd − Qs | horizontal gap from Qs to Qd below Pe |
| Qs > Qd | excess supply = Qs − Qd | horizontal gap from Qd to Qs above Pe |
| Qd = Qs | excess = 0 | the price line passes through equilibrium |
If 1,870 sunglasses are demanded and 1,350 are supplied, excess demand is 1,870 − 1,350 = 520 pairs. State the unit and the price or context to which the calculation applies.
Subtract the smaller quantity from the larger only after naming which quantity is larger. Excess demand and supply are quantities, not price differences, and both readings must come from the same market price.
Use price signals to remove market imbalance
Market forces remove imbalance through price changes that alter both quantity demanded and quantity supplied along their curves, moving the market toward the intersection.
| Initial imbalance | Price response | Buyer response | Seller response | Result |
|---|---|---|---|---|
| excess demand: Qd > Qs | price rises | quantity demanded contracts | quantity supplied extends | gap narrows toward equilibrium |
| excess supply: Qs > Qd | price falls | quantity demanded extends | quantity supplied contracts | gap narrows toward equilibrium |
With excess demand for tickets at 1,500 krona, buyers compete for too few tickets and sellers can raise price. The higher price discourages some buyers and encourages more supply until Qd equals Qs at the equilibrium price.
The adjustment is movement along existing curves when determinants are unchanged. A shortage does not itself shift demand or supply; it creates price pressure that changes quantities demanded and supplied.