What is the law of supply and demand?
Short answer
The law of demand says that as the price of a good rises, the quantity demanded falls. The law of supply says that as the price rises, the quantity supplied rises. The market settles at the equilibrium price, where the quantity demanded equals the quantity supplied.
Step by step
- Draw a demand curve sloping down from left to right and a supply curve sloping up.
- Mark the equilibrium where they cross: price P₁ and quantity Q₁.
- A change in price causes a movement along a curve.
- A change in another factor shifts the whole curve: income or tastes shift demand; costs or technology shift supply.
- Find the new equilibrium and explain how price and quantity changed.
Worked example
A drought reduces the coffee harvest
- Supply falls, so the supply curve shifts left
- At the old price there is now a shortage
- The price rises and the quantity traded falls
Common mistakes
- Saying a rise in price shifts the demand curve. A price change is a movement along the curve.
- Labelling axes the wrong way round: price goes on the vertical axis, quantity on the horizontal axis.
- Describing the diagram without explaining why the change happened.
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