Supply and demand explained with examples

Demand curves slope downwards: at lower prices, people buy more. A change in the good's own price causes a movement along the curve. Other factors shift the whole curve:

• Right (increase): higher incomes (for normal goods), a rise in the price of a substitute, a fall in the price of a complement, positive advertising or trends.
• Left (decrease): the opposite changes.

Supply curves slope upwards: higher prices make it more profitable to produce. Factors that shift supply:

• Right (increase): lower production costs, better technology, subsidies, more firms entering the market, good weather (for crops).
• Left (decrease): higher costs, taxes on producers, poor harvests.

At equilibrium there's no shortage or surplus. If the price is above it, there's a surplus (excess supply) and sellers cut prices; below it, a shortage (excess demand) pushes prices up.

When a popular band announces a tour, demand for tickets shifts right. With a fixed number of seats (supply can't easily increase), the equilibrium price rises, which is why resale prices for popular concerts can be far above face value. If a poor harvest reduces the supply of coffee beans, supply shifts left, and coffee prices rise.

Price elasticity of demand measures how much quantity demanded responds to a price change. Goods with few substitutes, like fuel or medicine, tend to be inelastic (demand barely changes); goods with many substitutes, like one brand of crisps, tend to be elastic. It helps explain why taxes on inelastic goods raise a lot of revenue.

Label the axes (price on the vertical, quantity on the horizontal), label each curve (D and S), mark the original equilibrium (P1, Q1), draw the shift with an arrow, and mark the new equilibrium (P2, Q2). Then explain the change in words. Our AI economics tutor can check your diagrams and explanations.

1. The price of tea rises. What happens to the demand for coffee, and to its price?
2. New technology cuts the cost of making phones. What happens in the phone market?
3. The price of a good is set above equilibrium. What happens?

Answers:

1. Tea and coffee are substitutes, so demand for coffee shifts right: its price and quantity both rise.
2. Supply shifts right: the price falls and the quantity sold rises.
3. Quantity supplied is greater than quantity demanded, so there's a surplus; sellers tend to cut prices towards equilibrium.

• Demand: quantity buyers are willing and able to buy at each price.
• Supply: quantity sellers are willing and able to sell at each price.
• Equilibrium: the price where supply equals demand.
• Surplus: excess supply. Shortage: excess demand.
• Substitute: a good used instead of another. Complement: a good used with another.