Market Forces (Unit 1 Topic 3)

Supply and Demand: the Fundamentals

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A market brings together buyers and sellers. The demand curve slopes downward because people buy more when the price falls. The supply curve slopes upward because higher prices make production more worthwhile. Where the two cross is the equilibrium: the one price at which the quantity buyers want matches the quantity sellers will provide. Above it, unsold stock forces the price down. Below it, competing buyers bid it up.

 

Two things can happen on the diagram, and confusing them costs marks. A change in the good's own price moves you along a curve. A change in anything else — income, tastes, input costs, technology, the price of substitutes — shifts the whole curve.

 

Price elasticity

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Elasticity measures how strongly buyers and sellers respond to a price change. A flat curve is elastic: a small price change produces a large change in quantity. A steep curve is inelastic: quantity barely moves, so the adjustment shows up in price instead. This is why a supply shock sends petrol prices spiking, while in a market where output can expand easily the quantity does the adjusting.

Note that a straight-line curve has a different elasticity at every point along it. The steepness sets the overall responsiveness; the exact value depends on where you measure.

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Using the interactive

Drag either curve up or down to shift it, or use the shift sliders — left decreases, right increases. The elasticity sliders pivot each curve, from elastic (flat) to inelastic (steep).

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Watch the outcomes panel as you go. It reports equilibrium price and quantity, consumer and producer surplus, total welfare, and the actual PED and PES measured at the current equilibrium.

Start with the scenario buttons. Predict what will happen to P* and Q* before you click, then check whether the diagram agrees. Finish with the quiz.

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