Demand, Supply and Markets

How a market sets a price

In a market, buyers and sellers meet and a price is set. Buyers want to pay as little as they can; sellers want to charge as much as they can. The price settles where the amount buyers want to buy is exactly equal to the amount sellers want to sell. Two forces decide it. Demand is how much buyers are willing and able to buy at each price, and it usually rises as the price falls. Supply is how much sellers are willing and able to offer at each price, and it usually rises as the price rises. This module shows how these two forces set the price, and what happens when something changes.

Market words to know

Learn these before you study any market. They name the forces that set a price and the goods that pull demand one way or another.

Match the cause to its effect on demand

A shift against a movement

The commonest mistake in this topic is confusing a movement along a curve with a shift of the whole curve. They have different causes and different meanings.

What moves the supply curve?

A bakery finds that the cost of flour has fallen sharply, so at every price it can now afford to offer more bread. What happens to the supply curve for bread?

• It shifts to the right
• It shifts to the left
• The quantity moves along the same curve
• The supply curve disappears

Say why the price changed

Top answers never just say a price went up. They work through a chain. First name which curve shifts, demand or supply. Then say why it shifts and in which direction. Then state the effect on both the equilibrium price and the equilibrium quantity. For example, do not stop at prices rose. Explain that a cold winter raised demand, the demand curve shifted to the right, and at the old price there was a shortage, so the price rose and more was traded. Curve, cause, effect: that chain is what earns the marks.

Pick what raises demand

Select every change below that would increase the demand for a normal good, meaning it raises the amount wanted at every price.

• A rise in the income of buyers
• The good becomes more fashionable
• A rise in the price of a substitute good
• A fall in the price of the good itself
• A rise in the cost of producing the good

Order how a shortage clears

Buyers suddenly want more of a good. Put the events in order as the market moves to a new equilibrium.

• Demand for the good rises
• A shortage appears at the old price
• The shortage pushes the price up
• The higher price trims the quantity demanded
• The higher price raises the quantity supplied
• A new, higher equilibrium is reached

Complete the market facts

The quantity buyers are willing and able to buy at each price is _____. The quantity sellers are willing and able to offer at each price is _____. The price where the two are equal is the _____. A good bought instead of another is a _____.

A cold winter and the price of soup

Suppose a long cold winter sets in. More people want hot soup, so demand rises and the demand curve shifts to the right. At the price from last week there are now more buyers than tins on the shelf, which is a shortage. Shops notice the empty shelves and raise the price. As the price climbs, some buyers drop out and sellers bring more tins to market, until the quantity wanted again equals the quantity offered. The market has settled at a new, higher equilibrium. Later, a new soup maker enters the market, supply shifts to the right, and the price eases back a little. Each step is a shift, a shortage or a surplus, and a move to a new balance.

Spot the demand shifters

Tap the TWO changes below that SHIFT the demand curve, rather than causing a movement along it.

• A rise in the income of buyers raises demand at every price
• The good becoming fashionable raises demand at every price
• A fall in the price of the good itself moves quantity along the curve
• A rise in the cost of raw materials shifts supply, not demand

Work out the elasticity

A shop raises its price by 10 per cent. The quantity its customers buy then falls by 20 per cent. Ignoring the minus sign, what is the price elasticity of demand? Give your answer as a single number.

Steer a market

React to each change in the market for bicycles. Choose what happens to the equilibrium price and quantity.

• A city builds safe new cycle lanes, so more people want to cycle. Supply is unchanged. What happens in the bicycle market?
• A new machine lets factories make bicycles far more cheaply. Demand is unchanged. What happens?
• The price of petrol rises sharply, and cars and bicycles are substitutes. What happens in the bicycle market?

Build a market prediction

Choose the word for each gap to complete one correct prediction about a market.

Explain how a price is set

A friend says that shops simply charge whatever price they like. Explain how demand and supply actually set the price in a competitive market, and what happens when demand or supply changes.

• Explain what demand and what supply each mean
• Explain how the equilibrium price and quantity are reached
• Explain what happens to price and quantity when demand rises
• Explain what happens when supply rises
• Use the terms shortage, surplus and equilibrium correctly