Economics· 5 min read
Supply and Demand Explained (with a Simple Graph in Words)
Supply and demand is the core idea of economics. Together they explain why prices rise and fall and where they settle.
The two laws
Each describes how price relates to quantity.
- •Law of demand: as price rises, people want to buy less (and more when it falls).
- •Law of supply: as price rises, sellers want to supply more (and less when it falls).
Equilibrium
The market price settles where the quantity buyers want equals the quantity sellers offer — the equilibrium. Above it there is a surplus (price tends to fall); below it a shortage (price tends to rise).
What shifts the curves
Demand can shift with income, trends, or the price of related goods. Supply can shift with production costs, technology, or the number of sellers. A shift in either moves the equilibrium price and quantity.
Frequently asked questions
What is market equilibrium?
The price and quantity where demand equals supply, so there is no shortage or surplus.
What causes prices to rise?
Either demand increases or supply decreases (or both), pushing the equilibrium price upward.