What is demand?
Demand is the amount of a good buyers are willing and able to buy at each price. The law of demand says: other things staying the same, when the price rises, the quantity demanded falls. So the demand curve slopes downward.
Things other than price, such as buyers' income, the number of buyers, tastes, festivals and prices of related goods, shift the whole demand curve. A rise shifts it to the right; a fall shifts it to the left.
What is supply?
Supply is the amount sellers are willing to offer at each price. A higher price means more profit, so sellers bring more. The supply curve slopes upward.
A good harvest, cheaper inputs or better technology shift supply to the right. Bad weather, higher costs or taxes shift it to the left.
Market equilibrium
The equilibrium is where the demand and supply curves cross. At this price, quantity demanded = quantity supplied, so nothing is left over and nobody is left waiting.
- If the price is above equilibrium, sellers have extra stock (excess supply), so they cut the price.
- If the price is below equilibrium, buyers compete for too few goods (excess demand), so the price rises.
Either way the market is pushed back to the equilibrium point.
What happens when a curve shifts?
Demand rises (curve moves right): price ↑ and quantity ↑. Demand falls: price ↓ and quantity ↓.
Supply rises (curve moves right): price ↓ and quantity ↑. Supply falls: price ↑ and quantity ↓.
Try these shifts with the two sliders in the 3D market above.
Real-world exceptions to the laws
The law of demand holds other things being equal. In real life a few cases seem to break it:
- Giffen goods: for very poor families, when the price of a cheap staple (like coarse grain) rises, they cut costlier food and buy even more of the staple.
- Veblen (status) goods: some luxury items (designer bags, rare watches) are wanted more because they are expensive.
- Expectations: if people expect prices to rise further, they buy more now (panic buying before a shortage).
- Necessities: for life-saving medicines or salt, demand hardly falls when price rises.
Supply exceptions: farm output cannot rise quickly after a price rise (crops take months), and a worker earning a very high wage may choose more rest instead of more work.
Price ceilings (and price floors)
A price ceiling is a legal maximum price set by the government, usually to protect poor buyers. It matters only if it is below the equilibrium price.
Worked example (the 3D market)
Demand Qd = 100 − 0.5P; supply Qs = 0.5P − 20. Equilibrium: ₹120, 40 kg. Ceiling ₹80: Qd = 100 − 40 = 60 kg; Qs = 40 − 20 = 20 kg. Shortage = 60 − 20 = 40 kg.
Results of a ceiling: queues, rationing (ration cards), and black markets where goods are sold secretly above the legal price. India uses ration shops (public distribution system) to give fixed quantities of grain at low prices to needy families.
A price floor is a legal minimum price above equilibrium, e.g. the Minimum Support Price (MSP) for some crops or a minimum wage. It can cause a surplus, which the government may have to buy and store.
Market failures and public goods
A market failure happens when free buying and selling does not give the best result for society.
- Externalities: side effects on people outside the deal. A factory that pollutes a river does not pay the villagers who fall ill (negative). A person who gets vaccinated also protects others (positive).
- Public goods: goods that are non-excludable (you cannot stop anyone using them) and non-rival (one person's use does not reduce another's): street lights, national defence, lighthouses, flood warnings. People can enjoy them without paying (the free-rider problem), so private firms will not supply enough. The government provides them using taxes.
- Monopoly: a single seller can charge high prices and sell less.
- Lack of information: buyers may not know if a medicine or a used car is good.
The government corrects failures with taxes and fines on pollution, subsidies, rules, and by supplying public goods.
Try it at home
Track the price of tomatoes or onions at your local market for two weeks and note the weather and festivals. Did the price rise when supply fell (rain) or demand rose (festival)? Then use the sliders in the last 3D step to copy what you saw.
Key formulas and definitions
- Equilibrium: Quantity demanded (Qd) = Quantity supplied (Qs)
- Excess demand: Qd > Qs at a price below equilibrium (price tends to rise)
- Excess supply: Qs > Qd at a price above equilibrium (price tends to fall)
- Movement along a curve = change in price; shift of a curve = change in something other than price
- Price ceiling (below equilibrium) ⇒ shortage = Qd − Qs.
- Price floor (above equilibrium) ⇒ surplus = Qs − Qd.
- Public good: non-excludable and non-rival (e.g. street lights).
Worked examples
1. Demand for mangoes is Qd = 100 − 0.5P and supply is Qs = 0.5P − 20 (P in ₹ per kg). Find the equilibrium.
Set Qd = Qs: 100 − 0.5P = 0.5P − 20, so P = 120. Then Q = 100 − 60 = 40. Equilibrium: ₹120 per kg and 40 kg.
2. In the same market, a festival adds 20 kg to demand at every price: Qd = 120 − 0.5P. What is the new equilibrium?
120 − 0.5P = 0.5P − 20 gives P = 140 and Q = 50. Price rises by ₹20 and quantity rises by 10 kg.
3. At a price of ₹150 in the first market, is there excess demand or excess supply?
Qd = 100 − 75 = 25 kg, Qs = 75 − 20 = 55 kg. Qs > Qd, so there is an excess supply of 30 kg, and the price will fall.
4. With Qd = 100 − 0.5P and Qs = 0.5P − 20, the government sets a ceiling of ₹80. Find the shortage.
Qd = 100 − 40 = 60 kg. Qs = 0.5 × 80 − 20 = 20 kg. Shortage = 60 − 20 = 40 kg.
5. In the same market a price floor of ₹150 is fixed. What happens?
Qd = 100 − 75 = 25 kg; Qs = 75 − 20 = 55 kg. Surplus = 30 kg that nobody buys at that price.
6. Why will no private company build and charge for street lights on a village road?
Street lights are a public good: it cannot stop non-payers from using the light, and one person's use does not reduce another's. People would free-ride, so the company could not earn. The panchayat provides them from taxes.
Common mistakes
- Saying a fall in price "increases demand". A price change only moves you along the curve; it changes the quantity demanded.
- Shifting the wrong curve: a good harvest shifts supply, not demand; a rise in income shifts demand, not supply.
- Thinking more supply raises the price. A rightward supply shift lowers the equilibrium price.
- Forgetting the "other things being equal" condition when stating the law of demand or supply.