BUSS1040 · Economics For Business Decision Making
Supply & Demand
Topic 3 is the engine of the whole micro half: the laws of demand and supply, and how individual curves add up to a market curve by horizontal summation — inverting each to q(P), summing the quantities, and re-inverting, watching for the kink where a buyer or seller drops out. The other examinable distinction is shifts vs movements: a price change moves you along a curve, while any non-price determinant shifts the whole curve. It is examined as algebra (derive the market curve) and as conceptual MCQs (does this event shift demand or supply, and which way?).
What this chapter covers
- 011. The law of demand (downward-sloping) and the law of supply (upward-sloping)
- 022. Willingness to pay (demand) and willingness to sell (supply)
- 033. Individual → market curve by horizontal summation: invert to q(P), add, re-invert
- 044. Kinks in the market curve where one buyer or seller leaves at a choke price
- 055. Movement along a curve (price change) vs shift of a curve (non-price determinant)
- 066. Demand shifters: income, tastes, prices of related goods, expectations, number of buyers
- 077. Supply shifters: input prices, technology, expectations, number of sellers
- 088. Predicting the direction a shift moves equilibrium (setup for Topic 4)
Market demand by horizontal summation
- 2 marksInvert each individual demand to quantity as a function of price. Anna: qA = 8 − P. Ben: qB = (8 − P)/2 = 4 − 0.5P. Both are positive only for P ≤ 8.
- 2 marksHorizontally sum the quantities at each price: Q = qA + qB = (8 − P) + (4 − 0.5P) = 12 − 1.5P, valid for 0 ≤ P ≤ 8 (both buyers share the choke price 8, so there is no kink here).
- 1 markRe-invert to price form: from Q = 12 − 1.5P, P = (12 − Q)/1.5 = 8 − (2/3)Q.
Key terms
- Law of demand / law of supply
- Demand slopes downward (lower price → larger quantity demanded); supply slopes upward (higher price → larger quantity supplied), holding everything else constant (ceteris paribus).
- Horizontal summation
- The method for building a market curve from individuals: at each price, add the quantities each participant demands or supplies. Algebraically: invert each curve to q(P), sum the q's, then re-invert to P(Q).
- Kink
- A bend in the market curve at a choke price where one participant's quantity hits zero. Above that price only the participants still active count; below it, an extra term joins the sum, changing the slope.
- Movement along vs shift of a curve
- A change in the good's OWN price is a movement along the curve (a change in quantity demanded/supplied). A change in any other determinant is a shift of the whole curve (a change in demand/supply).
- Demand shifters
- Non-price determinants that move the demand curve: income, tastes/preferences, prices of substitutes and complements, expectations of future price, and the number of buyers.
- Supply shifters
- Non-price determinants that move the supply curve: input (factor) prices, technology, expectations, taxes/subsidies on producers, and the number of sellers.
Supply & Demand FAQ
Why do I add quantities, not prices, to get the market curve?
Because at any given market price, every buyer faces the SAME price and chooses their own quantity — so total market quantity at that price is the sum of the individual quantities. That is horizontal summation. If you tried to add prices you would be answering a different (and meaningless) question. The practical recipe: rewrite each curve as q = (something with P), add the q's at each price, then re-invert to P(Q) if the question wants the inverse form.
When does the market curve have a kink, and where?
A kink appears when the participants have different choke prices (the price at which their quantity hits zero). Above the higher choke price, only the participant(s) with the higher choke are active, so the curve is flatter/steeper accordingly; at and below that price, the other participant joins in and the slope changes. The kink sits at the higher of the choke prices. Always state the valid price range for each segment of a kinked curve.
How do I tell a shift from a movement along the curve?
Ask: did the good's OWN price change, or did something else change? If the good's own price changed, you move ALONG the existing curve (a change in quantity demanded or supplied). If anything else changed — income, tastes, a related good's price, input costs, technology, expectations, the number of participants — the whole curve SHIFTS (a change in demand or supply). A frequent MCQ trap describes a price change and asks you to name a 'shift' that is really just a movement.
How is Topic 3 examined?
Two ways. Algebraically: derive the market demand or supply curve by horizontal summation (invert, add, re-invert, note kinks and ranges). Conceptually: given an event (a rise in input prices, a fall in a substitute's price, a tax on sellers), state whether demand or supply shifts and in which direction, and predict what happens to equilibrium price and quantity — which links straight into Topic 4.
Exam move
Make 'invert, add, re-invert' your reflex for any market-curve question, and always write the price range over which your curve is valid — that habit catches kinks automatically. Build a two-column cheat list of demand shifters vs supply shifters and rehearse classifying events fast, because the conceptual MCQs hinge on shift-vs-movement and direction. Practise the qualitative chain too: name the shifter → which curve → which direction → what happens to P* and Q* — this is the setup the equilibrium and welfare questions in Topic 4 reward. The two killers here are adding prices instead of quantities (you must invert first) and calling a price-driven movement a 'shift'.
