Supply & Demand
Market forces, equilibrium price and factors affecting supply and demand
Demand: The quantity of a good consumers are willing and able to buy at different prices. **Law of demand:** As price rises, quantity demanded falls (inverse relationship) — demand curve slopes **downward**.
Factors that shift the demand curve (non-price):
- Income (higher income → more demand for normal goods)
- Price of related goods (substitutes and complements)
- Tastes and fashion
- Population size
Supply: Quantity producers are willing to sell at different prices. **Law of supply:** As price rises, quantity supplied rises — supply curve slopes **upward**.
Factors shifting supply:
- Cost of production (input prices)
- Technology improvements
- Government subsidies or taxes
- Number of producers
Market equilibrium: Where demand and supply curves intersect. At this price, quantity demanded = quantity supplied. No surplus (excess supply) or shortage (excess demand).
Price mechanism: Prices signal to producers what to make and consumers what to buy. If demand rises → price rises → producers supply more → new equilibrium.
Price elasticity of demand (PED): Measures responsiveness of demand to price change. PED = % change in Qd ÷ % change in P. Elastic (PED > 1): demand sensitive to price (luxuries). Inelastic (PED < 1): demand not very sensitive (necessities like atta/flour).
Key Points to Remember
- 1Demand: higher price → less demanded (inverse)
- 2Supply: higher price → more supplied (direct)
- 3Equilibrium: demand = supply, no shortage or surplus
- 4PED > 1 = elastic (luxury); PED < 1 = inelastic (necessity)
Pakistan Example
Ramadan Tomato Prices in Karachi — Supply and Demand in Action
Every Ramadan, tomato and onion prices in Karachi's wholesale markets spike. Demand rises (more cooking) while supply from Balochistan slows (seasonal). This is a classic demand-supply mismatch creating a shortage — price rises until equilibrium is restored. The government sometimes releases strategic reserves (shifts supply curve right) to reduce prices — AKU Economics in action.
Quick Revision Infographic
Economics — Quick Revision
Supply & Demand
Key Concepts
Formulas to Know
Demand: higher price → less demanded (inverse)Supply: higher price → more supplied (direct)Equilibrium: demand = supply, no shortage or surplusED > 1 = elastic (luxury); PED < 1 = inelastic (necessity)Ramadan Tomato Prices in Karachi — Supply and Demand in Action
Every Ramadan, tomato and onion prices in Karachi's wholesale markets spike. Demand rises (more cooking) while supply from Balochistan slows (seasonal). This is a classic demand-supply mismatch creating a shortage — price rises until equilibrium is restored. The government sometimes releases strategic reserves (shifts supply curve right) to reduce prices — AKU Economics in action.