Supply & Demand


What you need to learn

How do the market principles of supply and demand set prices for goods and services?

Where do prices come from?

supply curve

demand curve



equilibrium price/quantity

external factors that affect supply/price

Supply & Demand Vocab


labor market

volunteer exchange

price signals

Understanding Prices through Supply and Demand in Economics

In the world of economics, the concepts of supply and demand are like the heartbeat of the market, driving the prices of goods and services.

The Demand Curve

Definition and Explanation:
Demand represents how much of a product consumers are willing and able to purchase at various prices. The demand curve, a graphical representation of this relationship, typically slopes downward from left to right. This reflects the Law of Demand: as the price of a good increases, the quantity demanded decreases, and vice versa.

Real-World Example:
Consider the demand for smartphones. If the price of a popular model drops, more people are likely to buy it, increasing the quantity demanded.

The Supply Curve

Definition and Explanation:
Supply refers to how much of a product producers are willing and able to sell at various prices. The supply curve usually slopes upward from left to right, illustrating the Law of Supply: as the price of a good rises, the quantity supplied increases, and vice versa.

Real-World Example:
If the price of locally grown strawberries goes up, farmers may decide to grow more strawberries, thereby increasing the supply.

Equilibrium Price and Quantity

Definition and Explanation:
The equilibrium price is where the quantity demanded by consumers equals the quantity supplied by producers. At this point, the supply and demand curves intersect. The corresponding quantity is the equilibrium quantity.

Real-World Example:
If tablets are sold for $300 each, and both consumers are willing to buy and producers are willing to sell 500 units at this price, $300 is the equilibrium price, and 500 units is the equilibrium quantity.

Shortages and Surpluses

  • Shortage:
  • Definition: A shortage occurs when the quantity demanded exceeds the quantity supplied at a given price.
  • Real-World Example: If a new game console is priced too low, demand may exceed supply, resulting in a shortage.
  • Surplus:
  • Definition: A surplus happens when the quantity supplied exceeds the quantity demanded at a given price.
  • Real-World Example: If a bookstore prices a novel too high, it might end up with unsold stock, representing a surplus.

Shifts in Demand and Supply

  • Demand Shifts: Factors like changes in consumer preferences, income, prices of related goods, and expectations can shift the demand curve.
  • Example: A health scare related to a particular food can decrease its demand, shifting the demand curve leftward.
  • Supply Shifts: Factors such as production costs, technology, and number of sellers can shift the supply curve.
  • Example: Advances in technology can reduce production costs for electronics, increasing supply and shifting the supply curve rightward.

Understanding how supply and demand determine prices is crucial in economics. These concepts illustrate the dynamic nature of markets and the continuous interaction between consumers and producers. Real-world events, from technological advancements to changes in consumer preferences, constantly reshape these curves and, consequently, the prices we see in the market.

External Factors Affecting Prices of Goods and Services

In addition to the basic principles of supply and demand, various external factors can significantly influence the prices of goods and services. Understanding these factors is key to comprehending the complexities of the economic world.

1. Government Policies

  • Taxes and Subsidies:
  • Explanation: Taxes on goods increase production costs, leading to higher prices. Conversely, subsidies lower production costs, potentially reducing prices.
  • Example: A new tax on tobacco can increase the price of cigarettes, while subsidies for renewable energy can lower the cost of solar panels.
  • Price Controls:
  • Minimum Wage: Setting a minimum wage can increase labor costs for businesses, potentially leading to higher prices for products and services.
  • Price Ceilings and Floors: Price ceilings (maximum legal prices) and floors (minimum legal prices) can lead to shortages and surpluses. For instance, rent control (a price ceiling) can lead to a shortage of available housing.

2. Global Events and Trade Policies

  • Import Tariffs and Quotas:
  • Explanation: Tariffs (taxes on imports) and quotas (limits on the quantity of imports) can increase the price of foreign goods, affecting domestic prices.
  • Example: Tariffs on steel imports can increase the cost of cars in the domestic market.
  • Global Events:
  • Explanation: Events like political instability, pandemics, or natural disasters can disrupt supply chains, affecting prices globally.
  • Example: A political crisis in an oil-producing country can lead to a spike in global oil prices.

3. Market Competition and Monopolies

  • Competition:
  • Explanation: Increased competition typically leads to lower prices, as businesses vie for consumers.
  • Example: The entry of a new smartphone brand into the market might lead to lower prices for similar products.
  • Monopolies:
  • Explanation: A monopoly, where a single company dominates the market, can lead to higher prices due to lack of competition.
  • Example: A pharmaceutical company with a patent on a life-saving drug may set high prices due to the absence of competing products.

4. Consumer Preferences and Trends

  • Changing Preferences:
  • Explanation: Shifts in consumer tastes can lead to changes in demand, affecting prices.
  • Example: Increasing demand for electric vehicles, driven by environmental concerns, can raise their prices.
  • Trends and Fads:
  • Explanation: Temporary surges in popularity (fads) can cause short-term price spikes.
  • Example: The sudden popularity of a toy during the holiday season can lead to increased prices due to high demand.

5. Technological Advancements

  • Innovation:
  • Explanation: Technological breakthroughs can reduce production costs or create new products, affecting prices.
  • Example: Advancements in 3D printing technology can lower the cost of producing certain components, reducing the price of the final product.


The pricing of goods and services is a complex interplay of internal market dynamics and external factors. From government policies to global events and technological innovations, a multitude of elements can influence market prices. Understanding these factors provides a more comprehensive view of how economies function and respond to changes.