EconomicsPrinciples of EconomicsHigh school

Supply and Demand

Equilibrium price and quantity; shifts versus movements.

Prices in a competitive market come from the interaction of buyers and sellers. The demand curve slopes down: as price falls, people want more. The supply curve slopes up: as price rises, producers offer more. The equilibrium is the price at which quantity demanded equals quantity supplied, so there is no shortage or surplus.

A change in the good's own price moves along a curve. A change in anything else, such as income, tastes, input costs or the price of related goods, shifts a whole curve and creates a new equilibrium. Price ceilings below equilibrium cause shortages; price floors above it cause surpluses.

Key ideas

Equilibrium: set $Q_d = Q_s$ and solve for price.
Demand shifters: income, preferences, prices of substitutes and complements, expectations, number of buyers.
Supply shifters: input costs, technology, taxes and subsidies, number of sellers.
Demand up raises both price and quantity; supply up lowers price and raises quantity.

Worked example

Demand is $Q_d = 100 - 2P$ and supply is $Q_s = 20 + 2P$ . Find the equilibrium.

Set equal: $100 - 2P = 20 + 2P$ .
$80 = 4P$ , so $P = 20$ .
$Q = 100 - 40 = 60$ .
Check: $Q_s = 20 + 40 = 60$ .

Answer: $P = 20$ , $Q = 60$

Common mistakes

Calling a price change a shift in demand rather than a movement along it.
Assuming a ceiling above equilibrium has any effect.
Mixing up which curve a cost change shifts (it shifts supply).

Practice questions

Try each one, then open the answer. Numerical answers on this page are verified by an automated calculation check.

1.Equilibrium price for $Q_d = 50 - P$ and $Q_s = 2P - 10$ .
Show answer
$20$
2.With $Q_d = 100 - 2P$ and $Q_s = 20 + 2P$ , the shortage at a ceiling of $P = 15$ .
Show answer
$20$
3.Equilibrium quantity for $Q_d = 50 - P$ and $Q_s = 2P - 10$ .
Show answer
$30$

Key ideas

Worked example

Common mistakes

Practice questions

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