What is demand?
Demand is the quantity of a product that consumers are willing and able to buy at a given price. The law of demand states that as the price of a good rises, the quantity demanded falls (and vice versa), assuming all other factors remain constant. This creates a downward-sloping demand curve.
Factors that shift the demand curve:
- Income — higher income increases demand for normal goods but decreases demand for inferior goods (e.g., value brands).
- Substitutes — if the price of Coca-Cola rises, demand for Pepsi may increase.
- Complements — if the price of printers falls, demand for ink cartridges rises.
- Trends and tastes — social media can cause sudden demand spikes.
- Population — more people means more potential buyers.
What is supply?
Supply is the quantity of a product that producers are willing and able to sell at a given price. The law of supply states that as the price rises, the quantity supplied also rises, because higher prices make production more profitable. This creates an upward-sloping supply curve.
Factors that shift the supply curve:
- Costs of production — higher raw material or wage costs reduce supply.
- Technology — better technology lowers costs and increases supply.
- Government policy — subsidies increase supply; taxes reduce it.
- Number of firms — more competitors means greater total supply.
- Weather/natural events — droughts reduce agricultural supply.
Equilibrium
Equilibrium is the point where the supply and demand curves cross. At this point, the quantity supplied equals the quantity demanded, and the market “clears” — there is no surplus and no shortage. The price at this point is the equilibrium price (or market price).
Simplified diagram
Price | / | / Supply | / | / <-- Equilibrium | / | / | / Demand |/ +------------- Quantity
If price is above equilibrium, there is a surplus (supply exceeds demand) and prices fall. If price is below equilibrium, there is a shortage (demand exceeds supply) and prices rise. The market naturally moves towards equilibrium.
Real-world example
During the 2020 pandemic, demand for hand sanitiser surged while supply could not keep up. This created a shortage, and prices spiked. Over time, more manufacturers entered the market (increasing supply), and prices fell back towards normal. That is supply and demand in action.
Exam tip: Always explain which curve shifts and in which direction. Saying “demand increased” is vague. Say “the demand curve shifted to the right because consumer income rose, increasing the equilibrium price from P1 to P2.”