Economics
Supply and demand — quick study summary
Supply and demand is the core model of price formation in a competitive market. Demand slopes downward (lower price → higher quantity demanded); supply slopes upward (higher price → higher quantity supplied). Equilibrium price clears the market — quantity supplied equals quantity demanded.
Key points
- Law of demand: ↓ price → ↑ quantity demanded (ceteris paribus)
- Law of supply: ↑ price → ↑ quantity supplied (ceteris paribus)
- Equilibrium = intersection of supply and demand curves
- Shifters of demand: income, prices of related goods, tastes, expectations, population
- Shifters of supply: input costs, technology, taxes/subsidies, expectations, number of sellers
In more depth
Movements versus shifts
A change in the good's own price causes a movement along the demand or supply curve. A change in anything else shifts the whole curve. Demand shifts with income, tastes, the prices of substitutes and complements, and population. Supply shifts with production costs, technology, taxes, subsidies and the number of sellers.
Finding the new equilibrium
After a shift, there is a shortage or surplus at the old price. With a shortage, the price rises until quantity demanded equals quantity supplied; with a surplus, it falls. If demand increases, equilibrium price and quantity both rise. If supply increases, the price falls and quantity rises.
Price elasticity of demand
Elasticity measures how strongly quantity demanded responds to a price change. Demand tends to be elastic when there are close substitutes, the good is a luxury or it takes a large share of income. Necessities with few substitutes, such as fuel in the short run, tend to be inelastic.
Common mistakes
- Saying a fall in price shifts the demand curve. It causes a movement along the curve.
- Confusing 'demand' with 'quantity demanded'.
- Shifting both curves when only one condition has changed.
Practice quiz
Click each question to reveal the answer.
1. If a normal good's price rises, what happens to quantity demanded?
- Increases
- Decreases
- Stays the same
- Becomes zero
Answer: Decreases
2. What does an increase in input costs do to the supply curve?
Answer: Shifts left (decreases supply)
3. At equilibrium, what is true about quantity supplied and quantity demanded?
Answer: They are equal
Last reviewed: May 2026