ECON10004 · Introductory Microeconomics
Supply and Demand
A market is buyers and sellers of a good interacting, and the demand and supply model is the engine the rest of ECON10004 runs on: nearly every exam calculation starts by finding where the two curves cross and then layers a policy on top.
The demand curve slopes downward (the law of demand) and the supply curve slopes upward (the law of supply). The single price at which quantity demanded equals quantity supplied is the equilibrium (P*, Q*), where the market clears. The chapter tests three things: distinguishing a movement along a curve (own-price change) from a shift of the curve (a shifter changes); running the four comparative-static cases; and solving linear demand and supply algebraically. It follows the Chapter 1 'thinking like an economist' foundations and feeds directly into surplus, elasticity, and every government-policy chapter that follows.
What this chapter covers
- 012.1 The demand curve & its shifters
- 022.2 The supply curve & its shifters
- 03Movement along vs shift of a curve
- 042.3 Market equilibrium (surplus & shortage)
- 052.4 Comparative statics — the four cases
- 06Solving linear demand & supply algebraically
EX 2.1 — Equilibrium from linear equations
- +1Set quantity demanded equal to quantity supplied: 100 − 2P = 2P.
- +1Collect the P terms: 100 = 2P + 2P = 4P.
- +1Solve for price: P* = 100 ÷ 4 = $25.
- +1Substitute back for quantity: Q* = 2P* = 2 × 25 = 50 (check via the other curve: 100 − 2×25 = 50 ✓).
Key terms
- Market
- Buyers and sellers of a particular good or service interacting. The interaction of demand (buyers) and supply (sellers) determines the price and quantity traded, which is what the whole model solves for.
- Law of demand
- Holding all else equal, as a good's own price rises, the quantity demanded falls. This inverse relationship is why the demand curve slopes downward; each point also shows the most a buyer will pay (their marginal value).
- Law of supply
- Holding all else equal, as a good's price rises, the quantity supplied rises, because higher prices make production worthwhile. This is why the supply curve slopes upward; each point is the lowest price a seller will accept (marginal cost).
- Equilibrium (P*, Q*)
- The single price P* at which quantity demanded equals quantity supplied, with matching quantity Q*. At this crossing the market clears and there is no pressure to change; it is the point every calculation begins from.
- Comparative statics
- Comparing equilibria before and after a shock: shift one curve, hold the other fixed, and read off how P* and Q* change. The four standard cases (demand or supply, up or down) are the 'increase / decrease' exam questions.
Supply and Demand FAQ
How do I tell a movement ALONG the curve from a SHIFT of the whole curve?
A change in the good's own price is a movement along a fixed curve — a change in quantity demanded (or supplied). A change in any shifter (income, prices of related goods, tastes, expectations, number of buyers/sellers, input prices, technology) is a shift of the whole curve — a change in demand (or supply) itself. Almost every true/false item in this chapter lives entirely on this distinction, so name which one it is and why.
Which way do P* and Q* move when a curve shifts?
Demand shifts → P* and Q* move the SAME way (both up if demand rises, both down if it falls). Supply shifts → P* and Q* move in OPPOSITE ways (supply up means price down, quantity up). Memorise this two-line rule and you can answer the four comparative-static cases without re-deriving the diagram each time.
What happens if BOTH curves shift at once?
Then only one of P* or Q* is determined; the other is ambiguous and depends on the relative size of the two shifts. Don't guess a direction — state which variable is determined, state that the other is ambiguous, and give the reason (it depends on which shift dominates). Saying 'ambiguous' with a reason earns the mark.
When I solve linear equations, do I set prices equal or quantities equal?
Set quantities equal: Qd = Qs, never prices. Buyers and sellers face the same market price, so it's the quantities that pin down P*. Also note that although we write Q as a function of P, economists draw P on the vertical axis — do the algebra in whatever form is given, then map it to the graph, and sketch the intercepts first to catch sign errors.
Exam move
Marks here are won by being mechanical and explicit. For every market start with the free-market equilibrium: set Qd = Qs, solve for P*, substitute back for Q*, then verify by subbing P* into the other curve — that check is free marks. Show every algebra line. For comparative-statics questions, lean on the two-line rule (demand shift → same direction; supply shift → opposite directions) and, when both curves move, write 'ambiguous' plus the reason. The most common lost marks are confusing a movement along with a shift, and setting prices equal instead of quantities — label a clean diagram and you protect both.
