Demand, Supply and Market Equilibrium

The two curves

Demand slopes downward: at a lower price buyers buy more, both because the good is now cheap relative to substitutes and because their purchasing power stretches further. Supply slopes upward: a higher price covers the rising cost of producing extra units, so sellers offer more.

Equilibrium, shortage, surplus

• Equilibrium is where quantity demanded equals quantity supplied. No pressure to move.
• Price below equilibrium ⇒ $Q_d>Q_s$ ⇒ a shortage; buyers bid the price up.
• Price above equilibrium ⇒ $Q_s>Q_d$ ⇒ a surplus; sellers cut the price.

A binding price ceiling must sit below equilibrium and creates a permanent shortage; a binding price floor sits above it and creates a permanent surplus.

Shift versus movement

Only a change in the good's own price moves you along a curve. Everything else — income, tastes, prices of related goods, expectations, number of buyers on the demand side; input costs, technology, taxes, number of sellers on the supply side — shifts the whole curve.