EC211 · LESSON 02 / 08

2. Demand–supply and equilibrium

A food stall has leftovers at a high price, but some customers cannot buy at a very low price. How do we find a price at which the market clears?

Understand

What is this lesson explaining?

Demand relates price to the quantity buyers are willing and able to buy per period, not merely what they want. Supply relates price to the quantity sellers offer, holding other factors constant.

The standard graph puts price vertically and quantity horizontally. A change in the good’s own price moves along a curve. Income, tastes, or input prices can shift a whole curve. Higher income shifts demand right for a normal good.

KEY MODEL

Qd = 100 − 2P

Qs = 20 + 2P

Qd = Qs

QdQuantity demanded per periodQsQuantity supplied per periodPPrice per unit

See it on a graph

The graph is right here

Read the axes and original point first. Then change one value at a time and watch the curve or point move.

KEY MODEL

Qd=100−2P

Qs=20+2P

tax=0

P1 (E₀=Pᵦ E₁=Pₛ): Q=60, P=20

D₀D₁S

Change demand: 0 Qd units changed at each fixed price Tax per unit: 0 model units

Demand and supply intersect at Q=60. Buyers pay 20 and sellers receive 20. With zero tax the prices coincide. Demand changes shift D; a tax creates a price wedge rather than shifting D.

Blue dashed: original · Solid: new state · E₀/A: original point · E₁/B: new point. Coincident points share a label; use the explanation to read each result.

A curve shifts when one of its non-axis conditions changes. An adjusting point on a fixed curve is movement along that curve, not a shift of it.

Quick check

NO TYPING

If demand becomes Qd = 120 − 2P with supply unchanged, what is the new equilibrium?

Takeaway

Remember these two ideas

✓

Set 100 − 2P = 20 + 2P. Then 80 = 4P, giving P = 20 and Q = 60 units per day.

Common mix-upAn increase in the good’s own price does not shift demand left; it moves upward along the existing curve.

Assumptions and sources

A competitive market with flexible prices, downward-sloping demand, upward-sloping supply, and no tax or externality in the example.

Pindyck & Rubinfeld, Microeconomics, 9th Global Edition, ch. 2, pp. 44–45, 47 (PDF 46–47, 49); original examples and questions.