Demand, Supply & Market Equilibrium

You’ll be able to

Distinguish a change in quantity demanded/supplied from a shift of the curve
Identify the determinants that shift demand and supply
Predict changes in equilibrium price and quantity from shifts

The laws of demand and supply

The law of demand: as the price of a good falls, the quantity demanded rises (the demand curve slopes downward), because of the substitution and income effects and diminishing marginal utility. The law of supply: as price rises, the quantity supplied rises (the supply curve slopes upward), because higher prices cover higher marginal costs and attract more production. A movement along a curve is a "change in quantity demanded/supplied" caused only by the good’s own price; a shift of the curve is a "change in demand/supply" caused by anything else.

What shifts the curves

Demand shifts with the determinants often remembered as TRIBE: Tastes, number of Related goods’ prices (substitutes and complements), consumer Income (normal vs. inferior goods), Buyers (number of consumers), and Expectations. Supply shifts with input prices, technology, taxes and subsidies, prices of other goods a firm could produce, producer expectations, and the number of sellers. A rightward shift means "more at every price"; a leftward shift means "less at every price." The good’s own price never shifts its own curve — it only moves you along it.

Equilibrium and the double shift

Market equilibrium is the price where quantity demanded equals quantity supplied — the curves intersect. Above it there is a surplus (excess supply pushing price down); below it a shortage (excess demand pushing price up). When one curve shifts, both the equilibrium price and quantity change predictably. When both curves shift, only one of price or quantity is determined — the other is ambiguous and depends on the relative sizes of the shifts. Recognizing which variable is indeterminate is a key exam skill.

Single-shift outcomes

Demand ↑ ⇒ P ↑, Q ↑ · Demand ↓ ⇒ P ↓, Q ↓ · Supply ↑ ⇒ P ↓, Q ↑ · Supply ↓ ⇒ P ↑, Q ↓

With one shift, both price and quantity are determined. With two shifts, one of the two becomes ambiguous.

Worked example

In the market for coffee, a frost destroys much of the coffee bean crop while at the same time a report publicizes coffee’s health benefits. Predict the effects on the equilibrium price and quantity of coffee.

1.The frost raises input costs / reduces beans, shifting supply left (supply ↓): pushes price up, quantity down.
2.The favorable health report increases tastes/demand, shifting demand right (demand ↑): pushes price up, quantity up.
3.Price: both shifts push price up → price definitely rises.
4.Quantity: supply ↓ lowers quantity but demand ↑ raises it → the net change in quantity is ambiguous, depending on which shift is larger.

Answer: The equilibrium price definitely rises (both shifts push it up), but the change in equilibrium quantity is indeterminate — it depends on whether the supply decrease or the demand increase dominates.

Checkpoint

The price of tea (a substitute for coffee) rises sharply. In the market for coffee, this will cause:

Watch out

A change in the good’s own price is a movement along the curve (change in quantity demanded/supplied), never a shift. Only a non-price determinant shifts the curve. Mislabeling a price change as a shift is the most common supply-and-demand error.

Checkpoint

In a market, demand increases and supply decreases at the same time. What can be said with certainty about the new equilibrium?

On the exam

For a double shift, one variable is always determinate and the other ambiguous. Identify the shared direction (both shifts pushing price or quantity the same way) — that variable is certain; the other depends on relative shift sizes.

Answer the 2 checkpoints as you read.