Market Supply and Demand Schedules

Think about the latest iPhone release - why does Apple price it at exactly £1,000 and not £500 or £2,000? The answer lies in supply and demand schedules. These tables show how many products businesses want to sell (supply) and consumers want to buy (demand) at different prices.

Looking at the iMac example, you can see a clear pattern. At £800, consumers want 7,000 iMacs but Apple only wants to supply 1,000 - that's a massive shortage! At £2,000, Apple wants to supply 7,000 but consumers only want 1,000 - now there's a surplus.

The magic happens somewhere in between these extremes. When you plot this data on a graph, you get the classic demand and supply curves that intersect at one crucial point.

Quick Tip: Remember that demand curves slope downward $cheaper = more demand$ whilst supply curves slope upward $higher prices = more supply$.

Market Equilibrium and Disequilibrium

Market equilibrium is the economic equivalent of finding the perfect balance on a seesaw. It occurs when quantity demanded exactly equals quantity supplied - in our iMac example, that's at £1,400 where 4,000 units are both demanded and supplied.

At this equilibrium price, the market "clears" efficiently. Apple's total revenue would be £5.6 million (£1,400 × 4,000 units), and there's no wastage or shortage. It's called the market clearing price because everything producers bring to market gets bought.

Disequilibrium happens when prices drift away from this balance point. At £1,600, there's excess supply (5,000 supplied vs 3,000 demanded), creating a surplus of 2,000 units weekly. At £1,000, there's excess demand (6,000 demanded vs 2,000 supplied), creating shortages.

Market forces naturally push prices back toward equilibrium. Surpluses force prices down, whilst shortages push them up.

Real World Connection: This is why popular trainers sell out quickly at retail price but appear on resale sites for much higher prices - it's disequilibrium in action!

Labour and Financial Markets

The same supply and demand principles that govern product markets also apply to labour and financial markets - you just need to adjust what you're measuring on each axis.

In labour markets, the "price" becomes the wage rate. The demand for labour is "derived demand" - businesses only hire workers because consumers want their products. When wages are low, firms demand more workers; when wages are high, they might replace workers with machinery instead.

The labour supply curve slopes upward because higher wages encourage more people to work. Labour market equilibrium occurs where labour demand equals labour supply, setting both the wage rate and employment level.

Financial markets work similarly but measure different "prices" - like interest rates for borrowing money or exchange rates for foreign currency. Whether it's the market for loans, stocks, or foreign exchange, the same equilibrium principles apply.

Career Insight: Understanding labour market equilibrium helps explain why some jobs pay more than others - it's all about supply and demand for particular skills!

Changes in Market Equilibrium

Markets are constantly shifting as conditions change, and you'll definitely face exam questions about this! When determinants of supply or demand change, the entire curves shift, creating new equilibrium points.

An increase in demand (rightward shift) might happen if iPhones become more popular. This pushes both price and quantity higher as the market moves to a new equilibrium point. The supply curve doesn't move, but there's an "extension" along it.

Similarly, supply changes shift the supply curve. An increase in supply (rightward shift) - perhaps due to new technology making production cheaper - leads to lower prices but higher quantities sold.

Remember the ACE diagram method: always label your Axes clearly, draw your Curves accurately, and mark both the old and new Equilibrium points. Use arrows to show the direction of shifts and changes.

Exam Success: Practice drawing these diagrams until they become second nature - they're guaranteed to appear on your exams!

Shifts in Supply and Demand

You need to master four key scenarios for your exams, each creating different outcomes for equilibrium price and quantity. These patterns repeat across all markets, from concert tickets to coffee beans.

A fall in demand creates a leftward shift, reducing both price and quantity. An increase in supply shifts the curve rightward, lowering prices but increasing quantity traded. A fall in supply does the opposite - higher prices but lower quantities.

Each shift has a clear cause-and-effect relationship. Changes in consumer income, tastes, or substitute prices affect demand. Changes in production costs, technology, or number of suppliers affect supply.

The key is understanding that one curve shifts whilst the other stays put, but there's movement along the stationary curve. This creates the new market equilibrium with different price and quantity combinations.

Memory Trick: "Rightward shifts are good news" - they increase either demand (higher prices for sellers) or supply (lower prices for buyers).

Related Market Effects - Substitutes

Markets don't exist in isolation - changes in one market create ripple effects in related markets. This interconnectedness is crucial for understanding real-world economics and tackling evaluation questions.

When Netflix subscription prices fall, it affects the DVD market because they're substitute goods. Cheaper Netflix makes DVDs less attractive, shifting the demand curve for DVDs leftward. This reduces both DVD prices and quantities sold as the market reaches a new equilibrium.

However, the extent of change depends on several factors. A small price change might barely affect DVD sales. The shift assumes ceteris paribus (all other things remain equal) - but what if the population grows or DVD quality improves?

Price elasticity also matters. If DVD demand is inelastic $price-insensitive$, even a significant Netflix price drop might not dramatically affect DVD sales.

Evaluation Skill: Always consider the "size of the effect" and what other factors might be changing simultaneously - this shows sophisticated economic thinking.

Real-World Application - Rising Costs

Let's apply your knowledge to a real scenario that perfectly illustrates supply-side market changes. When bacon prices rose 13% due to higher pig feed costs, it demonstrates how production cost increases shift supply curves.

Rising ingredient costs create a leftward shift in the bacon supply curve. Farmers face higher expenses, so they supply less bacon at each price level. This pushes the market equilibrium to higher prices and lower quantities - exactly what the data shows.

The extent of price rises depends on how much supply actually shifts. Small cost increases create modest changes, whilst significant input price rises can dramatically reshape markets. Consumer response also matters - if people love bacon regardless of price (inelastic demand), prices can rise substantially.

External factors complicate the picture. Health concerns might simultaneously reduce bacon demand, partially offsetting the supply-side price pressure. Government regulations or seasonal factors could also influence the final market outcome.

Real-World Learning: This bacon example shows how global events (crop failures affecting pig feed) can impact your local supermarket prices through supply and demand forces.

Practice Applications

These practice questions reinforce key concepts you'll encounter in exams. When household disposable income increases, luxury goods like iPhone 12 Pros see demand curve shifts rightward. People have more spending money, so they demand more premium products at each price level.

The result follows predictably: both equilibrium price and quantity rise as Apple can charge more whilst selling more units. This demonstrates how normal goods respond to income changes - higher incomes boost demand.

Indirect taxes on fast food create the opposite effect by shifting supply curves leftward. Takeaway businesses face higher costs, so they supply less at each price point. Doner kebab prices rise whilst quantities fall - the tax burden gets passed to consumers.

These examples show how government policies and economic conditions directly impact market outcomes through supply and demand mechanisms.

Exam Strategy: Always explain the shift direction first, then describe the new equilibrium, and finally discuss factors that might limit or enhance the effect.

Exam Technique Mastery

Mastering demand and supply analysis requires understanding the difference between analysis and evaluation - skills that separate good answers from excellent ones.

Analysis means tracing through cause and effect relationships. Start with an event (like changing consumer tastes), explain the consequence (demand curve shift), then follow through to the new equilibrium. Use connecting phrases like "as a result," "thus," and "this means that" to show clear logical progression.

Evaluation challenges your initial analysis by considering limitations and alternative outcomes. Consider the size of shifts, whether ceteris paribus holds, and how price elasticity affects outcomes. What if multiple factors change simultaneously?

Strong evaluation points include: extent of change depends on shift size; assumes other factors remain constant; elasticity determines how much prices vs quantities change; government intervention might limit market responses.

Grade Booster: Start evaluation paragraphs with "However" to signal you're considering alternative perspectives - this demonstrates sophisticated economic thinking that examiners love.