Demand, supply and market equilibrium

Edexcel International GCSE Economics· 1.1.3· 25 min read

1. Demand: Movements and Shifts★★☆☆☆⏱ 6 min

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📘 Definition

Demand

$D$ , $Q_{d}$

The quantity of a good or service that consumers are willing and able to buy at a range of prices over a given period of time.

Example:

At a price of $2 per loaf, the demand for bread in a town is 8,000 loaves per week.

The demand curve slopes downward from left to right, reflecting the inverse relationship between price and quantity demanded (ceteris paribus: all other factors held constant). Only a change in the price of the good itself causes a movement along the demand curve: a contraction (price rise, fall in $Q_{d}$ ) or extension (price fall, rise in $Q_{d}$ ) of demand.

Advertising: successful campaigns increase demand (right shift)
Income: rising income increases demand for normal goods (right shift)
Fashion and tastes: growing popularity of a good increases demand (right shift)
Price of substitutes: if a substitute good rises in price, demand for the original good rises (right shift)
Price of complements: if a complementary good rises in price, demand for the original good falls (left shift)
Demographic changes: population growth or changing age structures can increase demand for specific goods (right shift)

📐 Worked Example

Explain the effect of a successful global advertising campaign for plant-based milk on the demand curve for plant-based milk.

1
1. Advertising is a non-price shift factor for demand.
2
1. A successful campaign will increase the quantity of plant-based milk consumers are willing to buy at every price level.
3
1. This causes a rightward shift of the entire demand curve from D1 to D2, with no movement along the existing curve.

Exam tip:

When drawing demand shifts, label the original curve D1 and new curve D2 with a clear arrow showing the direction of shift to gain full diagram marks.

2. Supply: Movements and Shifts★★☆☆☆⏱ 6 min

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📘 Definition

Supply

$S$ , $Q_{s}$

The quantity of a good or service that producers are willing and able to sell at a range of prices over a given period of time.

Example:

At a price of $2 per loaf, bakers are willing to supply 8,000 loaves of bread per week.

The supply curve slopes upward from left to right, reflecting the positive relationship between price and quantity supplied: higher prices mean producers can earn more profit, so they increase output. Only a change in the price of the good itself causes a movement along the supply curve: a contraction (price fall, fall in $Q_{s}$ ) or extension (price rise, rise in $Q_{s}$ ) of supply.

Costs of production: rising raw material or labour costs reduce supply (left shift)
Changes in technology: more efficient production processes increase supply (right shift)
Indirect taxes: taxes on goods raise production costs, reducing supply (left shift)
Subsidies: government payments to producers lower costs, increasing supply (right shift)
Natural factors: bad weather or natural disasters reduce supply of agricultural goods (left shift)

📐 Worked Example

Explain the effect of a government subsidy given to solar panel manufacturers on the supply curve for solar panels.

1
1. Subsidies are a non-price shift factor for supply.
2
1. The subsidy reduces production costs for manufacturers, so they are willing to supply more solar panels at every price level.
3
1. This causes a rightward shift of the entire supply curve from S1 to S2.

Exam tip:

Always explicitly link the shift factor given in an exam question to the direction of the curve shift to earn full analysis marks.

3. Market Equilibrium★★★☆☆⏱ 7 min

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📘 Definition

Market Equilibrium

$P_{e}$ , $Q_{e}$

The point where quantity demanded equals quantity supplied, so there is no inherent pressure for price to change.

Example:

If consumers demand 8,000 loaves of bread at $2, and bakers supply 8,000 loaves at $2, the market is at equilibrium with $P_{e} = $2$ and $Q_{e} = 8, 000$ .

Equilibrium is found at the intersection of the demand and supply curves. When drawing equilibrium diagrams, always label the vertical axis (Price, P) and horizontal axis (Quantity, Q), plot the downward-sloping D and upward-sloping S curves, and mark the intersection point with $P_{e}$ on the y-axis and $Q_{e}$ on the x-axis. Any shift in demand or supply will create a new equilibrium point.

📐 Worked Example

Using a diagram, analyse the effect of a rise in consumer income on the equilibrium price and quantity of fresh fruit (a normal good).

1
1. Draw the original demand (D1) and supply (S1) curves, mark initial equilibrium $P_{e 1}$ and $Q_{e 1}$ .
2
1. Rising income is a demand shift factor: it increases demand for normal goods, shifting D1 right to D2.
3
1. At the original price $P_{e 1}$ , there is now excess demand, so price rises until a new equilibrium is reached at $P_{e 2}$ (higher than $P_{e 1}$ ) and $Q_{e 2}$ (higher than $Q_{e 1}$ ).
4
1. Conclusion: a rise in income increases both the equilibrium price and quantity of normal goods.

Exam tip:

When analysing curve shifts, always state the effect on both equilibrium price AND quantity to avoid losing easy marks.

4. Excess Demand, Excess Supply and Price Adjustment★★★☆☆⏱ 6 min

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📘 Definition

Excess Demand and Excess Supply

Excess demand (shortage) occurs when $Q_{d} > Q_{s}$ at a price below equilibrium. Excess supply (surplus) occurs when $Q_{s} > Q_{d}$ at a price above equilibrium.

To calculate excess demand or supply from a schedule or diagram, use the formula:

Excess = Q_d - Q_s

A positive result indicates excess demand, a negative result indicates excess supply, and a result of 0 means the market is at equilibrium. Free market forces automatically eliminate shortages and surpluses: excess demand pushes prices up to ration limited stock, while excess supply pushes prices down to clear unsold stock, until equilibrium is restored.

📐 Worked Example

The table below shows demand and supply schedules for loaves of bread: | Price ($) | Qd (thousands) | Qs (thousands) | | --- | --- | --- | | 1.00 | 12 | 4 | | 1.50 | 10 | 7 | | 2.00 | 8 | 8 | | 2.50 | 6 | 9 | | 3.00 | 4 | 11 | Calculate the excess supply or demand at a price of $2.50, and explain how market forces will adjust the price back to equilibrium.

1
1. At price = $2.50, $Q_{d} = 6, 000$ , $Q_{s} = 9, 000$ .
2
$Excess = 6,000 - 9,000 = -3,000$
3
1. The negative value means there is excess supply (surplus) of 3,000 loaves of bread.
4
1. Bakers have unsold loaves, so they reduce prices to encourage more consumers to buy bread. As price falls, $Q_{d}$ rises and $Q_{s}$ falls, until equilibrium is reached at $2.00, where $Q_{d} = Q_{s} = 8, 000$ .

Exam tip:

Always show your workings when calculating excess demand or supply, as you may earn method marks even if your final answer is incorrect.

5. Common Pitfalls

Wrong move:

Saying "demand rises" when describing the effect of a price fall, confusing a movement along the curve with a shift.

Why:

Only non-price factors change demand (shift the curve); price changes only change quantity demanded (movement along the curve).

Correct move:

Refer to "quantity demanded rises" when describing a price fall effect, and "demand rises" only for rightward curve shifts.

Wrong move:

Drawing demand curves upward sloping or supply curves downward sloping in diagrams.

Why:

The law of demand states price and $Q_{d}$ are inversely related (downward slope), and the law of supply states price and $Q_{s}$ are positively related (upward slope).

Correct move:

Always label curves and check their slope before adding equilibrium labels or shifts in exam diagrams.

Wrong move:

Calculating excess supply as $Q_{s} - Q_{d}$ and stating a positive value is excess demand.

Why:

The standard formula is $E x cess = Q_{d} - Q_{s}$ , so a negative result equals excess supply, and a positive result equals excess demand.

Correct move:

Always state whether your result is excess demand or supply after calculation, not just the numeric value.

Wrong move:

Only stating the effect on price (or only quantity) when analysing a curve shift.

Why:

Exam questions almost always award separate marks for identifying changes to both equilibrium variables.

Correct move:

After explaining the shift, explicitly write "equilibrium price rises/falls and equilibrium quantity rises/falls" in your answer.

Wrong move:

Mixing up demand and supply shift factors, e.g. attributing a rise in production costs to a demand shift.

Why:

Shift factors are specific to either demand or supply, and mixing them up leads to incorrect analysis and lost marks.

Correct move:

Memorise the separate lists of demand and supply shift factors, and always link the factor in the question to the correct curve.

6. Quick Reference Cheatsheet

Concept	Key Detail	Diagram Rule
Demand	Inverse P-Qd relationship; shift factors: advertising, income, tastes, substitutes, complements, demographics	Downward sloping, label D1/D2 for shifts, arrow for direction
Supply	Positive P-Qs relationship; shift factors: production costs, technology, taxes, subsidies, natural factors	Upward sloping, label S1/S2 for shifts, arrow for direction
Equilibrium	Qd = Qs, no price pressure	Label intersection: Pe (y-axis), Qe (x-axis)
Excess Demand	Qd > Qs, price < Pe; price rises to restore equilibrium	Mark gap between Qd and Qs below Pe, arrow up for price rise
Excess Supply	Qs > Qd, price > Pe; price falls to restore equilibrium	Mark gap between Qs and Qd above Pe, arrow down for price fall

7. Frequently Asked

What is the difference between a movement along the demand curve and a shift?

A movement along the curve is only caused by a change in the price of the good itself, and refers to a change in quantity demanded. A shift is caused by non-price factors (e.g. income, advertising), and changes demand at every price level, moving the entire curve left or right.

How do I calculate excess demand or supply from a data schedule?

For any given price, subtract quantity supplied from quantity demanded using the formula $E x cess = Q_{d} - Q_{s}$ . A positive result is excess demand, a negative result is excess supply, and a result of 0 means the market is at equilibrium.

Why does price automatically adjust when there is a shortage or surplus?

When there is excess demand (shortage), consumers compete for limited stock, bidding prices up. When there is excess supply (surplus), sellers cut prices to clear unsold stock. Price adjusts until $Q_{d} = Q_{s}$ and equilibrium is restored.

Going deeper

official_specEdexcel IGCSE Economics 4EC1 SpecificationRefer to section 1.1.3 for official topic guidance
practice_packS1 Market System Practice Questions

What's Next

Now that you have mastered demand, supply and market equilibrium, you are ready to move on to the next core topic in the market system unit: price elasticity of demand and supply, which explores how responsive quantity demanded and supplied are to changes in price and other variables. You will also apply this equilibrium knowledge to analyse government intervention in markets, including price controls, taxes and subsidies, which are common extended response topics in Edexcel IGCSE Economics Paper 1. Practise drawing shift diagrams for real-world contexts (e.g. energy markets, food price changes) to build confidence for 4-8 mark analysis questions in your exam.