Supply and demand describe how prices are set in a market: as price rises, demand (how much buyers want) generally falls, while supply (how much sellers offer) generally rises. The point where supply and demand curves meet is the equilibrium price, where the quantity buyers want to purchase matches the quantity sellers want to sell. Shifts in either curve — from changes in income, popularity, production costs or availability — cause the equilibrium price to change.
Example
If a popular new phone is released and demand suddenly spikes while supply stays limited, the equilibrium price rises — sellers can charge more since buyers are willing to pay it, at least until supply catches up or demand cools.
Key terms
Demand:
The quantity of a good or service buyers want to purchase at a given price.
Supply:
The quantity of a good or service sellers are willing to offer at a given price.
Equilibrium price:
The price at which quantity supplied equals quantity demanded.
Questions
1. Demand refers to:
How much buyers want to purchase at a given price
How much sellers are willing to offer only
A fixed number that never changes
Only government spending
2. Supply refers to:
How much sellers are willing to offer at a given price
How much buyers want to purchase only
A fixed number that never changes
Only consumer preferences
3. As price rises, demand generally:
Falls
Rises without limit
Stays exactly the same always
Has no relationship to price at all
4. As price rises, supply generally:
Rises
Falls to zero immediately
Stays exactly the same always
Has no relationship to price at all
5. The equilibrium price is where:
Quantity supplied equals quantity demanded
Supply is always zero
Demand is always zero
Price has no connection to quantity
6. A sudden spike in demand with limited supply typically causes price to:
Rise
Fall to zero
Stay exactly the same
Become entirely irrelevant
7. Market economics studies how:
Prices are set through supply and demand
Prices are set completely randomly
Governments alone set every single price
No factor at all influences prices
8. If supply of a good increases while demand stays the same, the equilibrium price will likely:
Fall
Rise sharply
Remain completely unaffected
Immediately reach zero
9. If demand for a good decreases while supply stays the same, the equilibrium price will likely:
Fall
Rise sharply
Remain completely unaffected
Immediately double
10. A rise in production costs for a good would most directly affect:
Supply
Demand only, with no effect on supply
Neither supply nor demand
Only the buyer's personal preferences
11. A popular new phone releasing with limited stock illustrates:
High demand meeting limited supply, raising the equilibrium price
Supply always exceeding demand for new products
Price having no connection to consumer interest
Demand having no effect on price whatsoever
12. Why might a rise in average income shift the demand curve for many goods to the right (increasing demand)?
Consumers with more disposable income are often willing and able to buy more at any given price
Income has no connection to consumer demand for goods
Rising income always causes demand to decrease instead of increase
Demand curves never shift for any economic reason
13. Why do sellers generally want to offer more of a good as its price increases?
Higher prices typically mean greater potential profit, incentivising increased production or sales
Sellers always want to offer less as price increases
Price has no influence on how much sellers want to supply
Selling more at a higher price is always less profitable
14. Why is the equilibrium price considered a natural balancing point in a market, rather than an arbitrary number?
It reflects the price at which buyers' and sellers' quantities align, with no surplus or shortage
Equilibrium price is set entirely by government decree with no market input
The equilibrium price is always completely random and unrelated to supply or demand
Buyers and sellers never actually reach an aligned quantity at any price
15. Why might a shortage occur if a price is artificially kept below the equilibrium price (like some rent-controlled housing)?
At a lower price, demand exceeds the amount sellers are willing to supply, creating unmet demand
Prices below equilibrium always create an oversupply of the good instead
Artificial price controls never have any effect on supply or demand
A shortage can only occur when price is set above equilibrium
16. Why might a surplus occur if a price is artificially kept above the equilibrium price (like some agricultural price supports)?
At a higher price, supply exceeds the amount buyers are willing to purchase, creating unsold surplus
Prices above equilibrium always create a shortage instead of a surplus
Artificial price floors never have any effect on the balance of supply and demand
A surplus can only ever occur when price is set below equilibrium
17. Why might understanding supply and demand help explain price changes in everyday situations, like petrol prices fluctuating?
Changes in global supply (like production levels) or demand (like travel patterns) directly influence how prices shift over time
Petrol prices are always set at a completely fixed rate with no market influence
Supply and demand have no real connection to prices consumers experience daily
Price changes in real markets are always due to entirely random, unexplainable factors
18. A decrease in the price of a popular substitute product (e.g. a rival phone brand) would likely:
Decrease demand for the original product, as buyers switch to the cheaper substitute
Always increase demand for the original product with no exceptions
Have no effect on demand for the original product at all
Immediately eliminate the market for the original product entirely
19. Why might government taxes on a good (like tobacco) be used partly as a tool to reduce demand?
Raising the effective price to consumers can reduce the quantity demanded, discouraging consumption
Taxes always increase demand for the taxed good
Taxation has no connection to consumer demand for any product
Government policy never influences supply or demand in a market
20. Why might seasonal products (like specific fruits) show more dramatic price swings than year-round staple goods?
Supply fluctuates significantly with the growing season, creating larger imbalances against relatively steady demand
Seasonal products always have completely constant supply throughout the year
Price swings are entirely unrelated to the availability of a product
Staple goods experience more dramatic price changes than seasonal products
21. Why might economists study elasticity (how much quantity demanded changes in response to price) rather than assuming all goods respond to price changes identically?
Some goods (like essential medicine) see little change in demand despite price changes, while others (like luxury items) are much more sensitive
All goods and services always respond to price changes in an identical way
Elasticity has no relevance to understanding real-world markets
Demand for every product is always completely unaffected by its price
Answer key (parent copy)
1. How much buyers want to purchase at a given price
2. How much sellers are willing to offer at a given price
3. Falls
4. Rises
5. Quantity supplied equals quantity demanded
6. Rise
7. Prices are set through supply and demand
8. Fall
9. Fall
10. Supply
11. High demand meeting limited supply, raising the equilibrium price
12. Consumers with more disposable income are often willing and able to buy more at any given price
13. Higher prices typically mean greater potential profit, incentivising increased production or sales
14. It reflects the price at which buyers' and sellers' quantities align, with no surplus or shortage
15. At a lower price, demand exceeds the amount sellers are willing to supply, creating unmet demand
16. At a higher price, supply exceeds the amount buyers are willing to purchase, creating unsold surplus
17. Changes in global supply (like production levels) or demand (like travel patterns) directly influence how prices shift over time
18. Decrease demand for the original product, as buyers switch to the cheaper substitute
19. Raising the effective price to consumers can reduce the quantity demanded, discouraging consumption
20. Supply fluctuates significantly with the growing season, creating larger imbalances against relatively steady demand
21. Some goods (like essential medicine) see little change in demand despite price changes, while others (like luxury items) are much more sensitive