Supply and demand curves determine market equilibrium at the price where quantity demanded equals quantity supplied. At this equilibrium price, there is no pressure for the market price to change, assuming other factors remain constant.
This is IB Economics subtopic 2.3 Competitive market equilibrium, studied at both SL and HL.
The demand curve shows the quantity consumers are willing and able to buy at different prices. It slopes downward because, according to the law of demand, quantity demanded normally rises when price falls.
The supply curve shows the quantity producers are willing and able to sell at different prices. It slopes upward because, according to the law of supply, quantity supplied normally rises when price rises.
Where the two curves intersect, quantity demanded equals quantity supplied. This establishes the equilibrium price, , and equilibrium quantity, .
| Market situation | Adjustment toward equilibrium |
|---|---|
| Price above | Quantity supplied exceeds quantity demanded, creating excess supply (a surplus). Producers lower the price, causing quantity demanded to rise and quantity supplied to fall. |
| Price below | Quantity demanded exceeds quantity supplied, creating excess demand (a shortage). Competition among consumers pushes the price upward, causing quantity demanded to fall and quantity supplied to rise. |
| Price equals |
If a non-price determinant shifts demand or supply, the intersection changes and a new market equilibrium forms. For example, higher consumer income may shift demand for a normal good rightward, raising both equilibrium price and equilibrium quantity, ceteris paribus.
A common misconception is that every price change shifts a curve. A change in the good’s own price causes a movement along both curves; only a change in a non-price determinant shifts demand or supply.
Exam technique: For an “explain” question, draw fully labelled Price and Quantity axes, label , , , and , and explain the shortage or surplus adjustment as a linked causal chain.