Demand, supply and price: Class 11 Economics

Key points

Demand is the quantity of a good that buyers are willing and able to buy at each price in a given period. A want becomes demand only when the buyer has the money to pay. A table that lists prices with quantities demanded is a demand schedule, and a graph of it is the demand curve.

The law of demand says that, other things being equal, when the price of a good rises the quantity demanded falls, and when the price falls the quantity demanded rises. The demand curve therefore slopes downward from left to right. The reasons are that a higher price makes the good cost more compared with other goods, and that a buyer can afford less of it from the same income.

Factors that change demand (shift the whole curve):

• The income of buyers. For a normal good, higher income raises demand.
• The prices of related goods. A rise in the price of a substitute, such as tea, raises the demand for coffee. A rise in the price of a complement, such as petrol, lowers the demand for cars.
• Tastes and fashion.
• The number of buyers, which is the size of the population.
• Expectations about future prices and income.

A change in the price of the good itself causes a movement along the same demand curve, which is called a change in the quantity demanded. A change in any other factor shifts the whole curve, which is called a change in demand. Students often mix these two ideas.

Supply is the quantity of a good that sellers are willing and able to offer at each price in a given period. The law of supply says that, other things being equal, a higher price brings a larger quantity supplied, so the supply curve slopes upward. Producers supply more at a higher price because it is more profitable.

Supply increases, and the curve shifts to the right, when costs of production fall, when technology improves, when the number of sellers rises or when the government gives a subsidy. A tax on producers or a rise in costs shifts the curve to the left.

The equilibrium price is the price at which the quantity demanded equals the quantity supplied. At a higher price there is a surplus, so sellers lower the price. At a lower price there is a shortage, so buyers bid the price up. The market moves towards the equilibrium. If demand rises and supply stays the same, the price and the quantity both rise. If supply rises and demand stays the same, the price falls and the quantity rises.

Price elasticity of demand measures how much the quantity demanded responds to a change in price. It is the percentage change in quantity demanded divided by the percentage change in price. When the number, ignoring the sign, is more than 1, demand is elastic. When it is less than 1, demand is inelastic. Necessities, such as flour or medicine, usually have inelastic demand, and luxuries have elastic demand.

Study tip: Draw a small demand and supply diagram for every question on price. Label the axes, mark the equilibrium and show the shift with an arrow.

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Common mistakes

• Drawing a demand curve that slopes upward. For a normal good it slopes downward.
• Mixing up a movement along the curve and a shift of the curve.
• Writing that supply falls when the price falls. A lower price reduces the quantity supplied, which is a movement along the curve.
• Forgetting that a price rise raises revenue only when demand is inelastic.

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