• Demand is the willingness AND ability to buy at a given price — the law of demand says price and quantity demanded move in opposite directions.
• Movements along the demand/supply curve happen only when price changes — these are called extensions/contractions.
• Shifts of the entire curve happen when a non-price determinant changes (income, tastes, cost of production, etc.).
• Supply has a positive relationship with price — producers supply more as price rises to maximise profit.
• Market equilibrium is where demand = supply, at the "market clearing price."
• Disequilibrium happens when price sits away from equilibrium — creating excess demand (shortage) or excess supply (surplus).
• Markets are self-correcting: sellers adjust prices until the shortage or surplus disappears.
• Real-world shocks (pandemics, hurricanes, subsidies, inflation) shift demand or supply curves and create new equilibrium points.

What actually is "demand"?

Demand isn't just "wanting" something. If you'd love a Ferrari but can't afford one, that's not economic demand — it's just a wish. Economists only count demand when it's backed by the ability to pay. This is why the definition says demand is the amount a consumer is willing AND able to purchase at a given price, in a given time period.

Think of a demand curve as a "wish list ranked by price sensitivity" — it plots how the quantity people are willing and able to buy changes as price changes. Economists draw it as a straight line to make the analysis easier, even though real-world data would form a wobbly curve.

The Law of Demand

Movement ALONG the demand curve

This only happens when price is the only thing that changes. You stay on the exact same curve — you just slide to a different point on it.

• Contraction in QD = price rises → quantity demanded falls (movement UP the curve).
• Extension in QD = price falls → quantity demanded rises (movement DOWN the curve).

Why does the whole curve move?

A shift happens when something other than price changes — these are called the non-price determinants of demand. Unlike a movement (sliding along the same line), a shift means an entirely new curve is drawn, because at every price level, people now want to buy a different amount.

The Determinants (memorise these!)

The producer's side of the story

Supply is the amount a producer is willing and able to sell at a given price, in a given time period. Unlike demand, the relationship here is positive — as price rises, producers want to supply more, because higher prices mean higher potential profit. This is why rational, profit-maximising firms are the driving logic behind the law of supply.

The Law of Supply

• Extension in QS = price rises → quantity supplied rises (movement UP the curve).
• Contraction in QS = price falls → quantity supplied falls (movement DOWN the curve).

Non-price determinants of supply

Just like demand, supply can shift entirely — not because price changed, but because something changed the conditions producers face, usually their costs or capacity.

Where demand meets supply

Picture a busy marketplace with no set prices. Sellers start high, hoping for a big profit. If nobody buys, they lower the price a bit. Buyers keep negotiating, sellers keep adjusting, until eventually they land on a price where the amount buyers want to buy exactly matches the amount sellers want to sell. That's the equilibrium — the point where the tug-of-war stops.

Any price above or below this equilibrium point creates disequilibrium — a mismatch between what buyers want and what sellers offer.

Excess Demand (Shortage)

This happens when the price is set too low — buyers want more than sellers are willing to provide at that price. Think of it like a hugely underpriced concert ticket: everyone wants one, but there aren't enough seats.

How the market fixes itself: Sellers notice stock flying off the shelves and realise they can raise prices. As price rises → contraction in QD (fewer people want it at the higher price) AND extension in QS (sellers are more incentivised to supply more). This continues until the market reaches equilibrium again.

Excess Supply (Surplus)

This happens when the price is set too high — sellers are producing more than buyers want to purchase. Think of unsold face masks piling up once the pandemic panic-buying faded.

How the market fixes itself: Sellers see stock piling up unsold and lower prices to generate revenue. As price falls → contraction in QS (fewer sellers want to supply at the lower price) AND extension in QD (buyers are more willing to purchase). This continues until equilibrium is restored.

Worked Example — Calculating Excess Demand

Question: Quantity demanded for motorcycles was 1000 (2022), 1400 (2023), 1600 (2024). Quantity supplied was 500 each year. Calculate total excess demand over 2022–2024.

1. Step 1: Total demand = 1000 + 1400 + 1600 = 4000
2. Step 2: Total supply = 500 + 500 + 500 = 1500
3. Step 3: Excess demand = Demand − Supply = 4000 − 1500 = 2500 motorcycles

The systematic 7-step method examiners want to see

Whenever you're given a real-world scenario (a pandemic, a hurricane, a subsidy, inflation), you need to walk through the whole chain of cause and effect. Here's the method used consistently across every example in this chapter:

1. Identify if the change is on the demand side or supply side.
2. State which way the curve shifts, using notation (e.g. D₁ → D₂).
3. State the disequilibrium that now exists at the original price (excess demand or excess supply).
4. State whether sellers raise or lower prices to clear it.
5. Explain the resulting contraction/extension on the OTHER curve (price changed → movement along, not another shift).
6. State the new equilibrium point (e.g. P₂Q₂).
7. Explain the market outcome — is the new price/quantity higher or lower than before?

Example: COVID Working-From-Home → Desk Demand ↑

Lockdowns forced people to set up home offices, creating a temporary change in taste — a non-price demand determinant. Demand for desks shifts D₁ → D₂. At the old price P₁, this creates excess demand (shortage). Suppliers raise prices → contraction in demand + extension in supply → new equilibrium at P₂Q₂, where both price and quantity are higher than before.

Example: Hurricane Fiona → Plantain Supply ↓

The hurricane destroyed crops — a natural factor affecting supply. Supply shifts S₁ → S₂ (decrease). At the old price, this creates excess demand (shortage, because now less is available at the same price people still want). Sellers raise prices → contraction in demand + extension in supply → new equilibrium with higher price but LOWER quantity than before.

Example: Inflation → Lobster Demand ↓

Rising inflation reduces real income (purchasing power falls even if nominal income is the same) — a non-price demand determinant. Since lobster is a luxury, demand shifts D₁ → D₂ (decrease). At the old price, this creates excess supply (surplus). Sellers lower prices → extension in demand + contraction in supply → new equilibrium with lower price AND lower quantity.

Example: EU Solar Panel Subsidy → Supply ↑

A government subsidy lowers the effective cost of production for solar panel retailers — supply shifts S₁ → S₂ (increase). At the old price, this creates excess supply (surplus). Sellers lower prices → extension in demand + contraction in supply → new equilibrium with lower price but HIGHER quantity.