Microeconomics · StudentHub Lesson
Supply and Demand
How buyers and sellers interact in markets to determine prices and quantities.
What you will learn
- Explain the law of demand and law of supply
- Identify factors that shift demand and supply curves
- Distinguish a shift in a curve from a movement along it
- Describe how markets use price signals to allocate resources
- Predict effects of shifts on price and quantity
Watch the lesson
Supply and Demand: Crash Course Economics #4 · CrashCourse
Watch on YouTubeTopic notes
Main Idea
Markets coordinate buyers and sellers through prices. The law of demand says quantity demanded falls as price rises; the law of supply says quantity supplied rises as price rises.
Key Concepts
- Demand curve slopes downward: price up -> quantity demanded down
- Supply curve slopes upward: price up -> quantity supplied up
- A change in price causes a movement along a curve
- A change in a non-price factor (income, tastes, input costs, technology, expectations) causes the entire curve to shift
- Price signals tell producers what and how much to make
Diagram (described)
Picture a graph with Price on the y-axis and Quantity on the x-axis. The demand line runs from upper-left to lower-right; the supply line runs from lower-left to upper-right. If demand increases, the whole demand line shifts right, not just a point on it.
Examples of Shifters
- Demand shifters: income, consumer tastes, prices of related goods, expectations, number of buyers
- Supply shifters: input costs, technology, taxes/subsidies, number of sellers, expectations
Common Mistakes
- Confusing 'change in demand' (shift) with 'change in quantity demanded' (movement along curve)
- Assuming price is the only thing that affects demand or supply
- Forgetting that a rightward shift in either curve is an increase, leftward is a decrease
Key concepts
Important terms
- Demand
- The quantity of a good buyers are willing and able to purchase at various prices.
- Supply
- The quantity of a good sellers are willing and able to produce at various prices.
- Shift in demand
- A change in the entire demand curve caused by a non-price factor.
- Price signal
- Information conveyed by prices that guides buyer and seller behavior.
Worked examples
Problem
The price of coffee beans rises. What happens to the supply curve for coffee?
- 1. Coffee beans are an input cost for coffee production
- 2. Higher input costs make producing coffee less profitable at each price
- 3. This shifts the supply curve
Answer: The supply curve shifts left (decrease in supply)
Quick revision
- Law of demand: price up, quantity demanded down
- Law of supply: price up, quantity supplied up
- Price change = movement along curve
- Non-price factor change = shift of curve
- Rightward shift = increase; leftward shift = decrease
- Markets use prices to signal scarcity and value
Check your understanding
Question 1 · Multiple choice
According to the law of demand, when price rises, quantity demanded:
Question 2 · Multiple choice
Which of these would shift the demand curve for a good?
Question 3 · True or false
A change in a good's own price causes the demand curve itself to shift.
Question 4 · Short answer
What is the difference between 'quantity demanded' and 'demand'?
Question 5 · Multiple choice
New technology that lowers production costs would cause the supply curve to:
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