← Economics Explained · Learning path
What are supply and demand?
Demand is the quantity buyers would purchase at different prices, with other conditions unchanged. Supply is the quantity sellers would offer. Market equilibrium is the point where those quantities match in a model. Before using the model, define the product, location, time period and buyers. Actual markets may take time to adjust, and equilibrium alone says nothing about fairness.
Movement versus shift
A change in the product’s own price normally means movement along a given curve. Income, tastes, substitute prices and expectations can shift demand. Input costs, technology, taxes and productive capacity can shift supply. If a harvest fails, reduced supply may raise price and reduce quantity. If both price and quantity rise, demand growth may be part of the explanation. However, simultaneous shifts prevent a unique diagnosis from two numbers alone.
Calculate an elasticity
Price elasticity of demand is percentage change in quantity demanded divided by percentage change in price, holding other influences fixed. For a finite change, the midpoint formula avoids choosing one endpoint as the base. Suppose price rises from 10 to 12 and quantity falls from 100 to 80. Quantity change is minus 20/90 = minus 22.22%. Price change is 2/11 = 18.18%. Elasticity is approximately minus 1.22. Revenue falls from 1,000 to 960. These are illustrative observations. Causality would require separating other influences.
Time horizon and substitutes
Demand tends to respond differently when consumers have time to switch. A commuter may have few immediate alternatives to fuel but more choices over years. Elasticities vary by income, product definition and circumstances. An estimate for one market should not be copied into another without justification.
Taxes and incidence
The person legally paying a tax need not bear its full economic burden. Prices, wages and returns can adjust, with relative supply and demand responsiveness affecting the distribution. Binding price ceilings can produce excess demand in a simple competitive model. Rationing and quality changes then matter. Policy evaluation should also consider objectives, enforcement and alternatives.
Practice
For a coffee shop, list one event that shifts demand and one that shifts supply. Explain why a price increase alone does not reveal whether demand strengthened. Then identify the quantity, input cost and competitor data that would help distinguish the explanations.
Sources and further reading
Examples use hypothetical figures unless stated otherwise. Updated 8 October 2026.
