Business Economics · Consumer demand and behaviour

Demand, Supply and Market Equilibrium: Shifts, Movements and Solving for Price

Updated 11 October 2026 · Fact-checked

Demand shows how much buyers want at each price. Supply shows how much sellers offer at each price. Market equilibrium is the price where quantity demanded equals quantity supplied. To solve it, set demand equal to supply, solve for price, then substitute back to find quantity. Non-price factors shift curves; price changes move you along them.

Understand Demand, Supply and Market Equilibrium

A demand curve shows the quantity of a good buyers are willing and able to buy at each price, holding everything else constant. It slopes downwards. This is the law of demand: as price falls, quantity demanded rises, other things equal. Buyers switch to substitutes when price rises, and they feel poorer (the income effect).

A supply curve shows the quantity sellers will offer at each price. It slopes upwards. Higher prices make production more profitable, and rising marginal cost means sellers need a higher price to produce more.

The most tested idea is movement versus shift. A change in the good's own price causes a movement along the curve. This is a change in quantity demanded (or supplied). A change in any other factor shifts the whole curve. This is a change in demand (or supply). Demand shifters: consumer income, prices of substitutes and complements, tastes, population, and expected future prices. Supply shifters: input costs, technology, taxes and subsidies, number of sellers, and expected future prices.

Equilibrium is where the curves cross. At that price, quantity demanded equals quantity supplied and there is no pressure for change. Above it there is a surplus (excess supply), so price falls. Below it there is a shortage (excess demand), so price rises. When a curve shifts, a new equilibrium forms. A rightward demand shift raises both price and quantity. A rightward supply shift lowers price and raises quantity.

The law of demand has possible exceptions. A Giffen good is an inferior good that takes a large share of a poor household's budget, so the income effect outweighs the substitution effect and demand can rise when price rises. A Veblen good is a status good, where a higher price makes it more desirable. These are rare cases. Treat them as exceptions, not as the normal rule.

Key rules to remember

Linear demand: Qd = a − bP; b > 0 gives a downward-sloping curve. a is the quantity demanded at price zero.
Linear supply: Qs = c + dP; d > 0 gives an upward-sloping curve. c may be negative, meaning no supply below a minimum price.
Equilibrium condition: Qd = Qs; Solve for P* first, then substitute into either equation for Q*.
Equilibrium price (linear case): P* = (a − c) ÷ (b + d); Valid for Qd = a − bP and Qs = c + dP.
Surplus or shortage: Surplus = Qs − Qd (if positive); Shortage = Qd − Qs (if positive); Evaluate both at the given non-equilibrium price.
Direction of shifts: Demand ↑: P ↑, Q ↑. Demand ↓: P ↓, Q ↓. Supply ↑: P ↓, Q ↑. Supply ↓: P ↑, Q ↓; Applies to a single shift with normal sloping curves.

How to solve Demand, Supply and Market Equilibrium questions

Use this method for numerical and diagram-based equilibrium questions.

1Identify what is given: equations, a table or a described event.
2If a price is given, decide whether it is above or below equilibrium, or just compute Qd and Qs at that price.
3For equations, set Qd = Qs and solve for the equilibrium price P*.
4Substitute P* into both equations to get Q*. Both must give the same value; this is your check.
5If an event is described, classify it: own-price change (movement) or other factor (shift of demand or supply).
6Decide which curve shifts and in which direction. Redraw it and find the new crossing point.
7State the effect on equilibrium price and quantity in words, with the reason.
8If a shift is given numerically, change the intercept in the equation and re-solve from step 3.

Quickest way: Equate, solve, check

When to use it: For MCQs and short calculations with linear demand and supply equations.

Write Qd and Qs as functions of P, in the same form.
Use P* = (a − c) ÷ (b + d), or set the two equal and rearrange.
Plug P* into one equation for Q*.
Check with the other equation in a few seconds.
For a shift question, sketch two curves and move one. Do not compute unless asked.

Common mistakes in Demand, Supply and Market Equilibrium

Calling a price change a shift in demand.
Students link any change in the market to the curve moving.
Fix: Ask what caused it. If the good's own price changed, it is a movement along the curve. Only other factors shift the curve.
Showing a rise in price as the cause of a fall in demand.
Wording blurs 'demand' and 'quantity demanded'.
Fix: Use 'quantity demanded' for movements and 'demand' for shifts. Write the correct term every time.
Getting the direction wrong when a complement or substitute price changes.
Students memorise outcomes instead of reasoning.
Fix: A higher price of a substitute raises demand for this good. A higher price of a complement lowers demand for this good.
Stating that Giffen goods always break the law of demand.
Exceptions are learned as absolute rules.
Fix: Say they can, and only if the income effect is strong enough to outweigh the substitution effect. Veblen goods are about status, not income effects.
Forgetting to substitute back and check quantity.
Students stop after finding P*.
Fix: Always compute Q* from both equations. If they differ, there is an arithmetic error.
Concluding that both price and quantity are certain when both curves shift.
Single-shift rules are applied to double shifts.
Fix: With two shifts, one of price or quantity is usually determinate and the other depends on the relative sizes of the shifts. State this.

Worked examples

Example 1

The demand for a product is Qd = 120 − 4P and supply is Qs = 20 + 6P, where P is in rupees and Q in units. Find the equilibrium price and quantity. Then find the surplus or shortage at a price of ₹12.

Show the solution

Set Qd = Qs: 120 − 4P = 20 + 6P.
Rearrange: 100 = 10P, so P* = 10.
Substitute into demand: Q = 120 − 4 × 10 = 80.
Check with supply: Q = 20 + 6 × 10 = 80. Matches.
At P = 12: Qd = 120 − 48 = 72 and Qs = 20 + 72 = 92.
Qs exceeds Qd by 92 − 72 = 20, so there is a surplus of 20 units.

Answer: Equilibrium price is ₹10 and equilibrium quantity is 80 units. At ₹12 there is a surplus of 20 units, which pushes price down.

Example 2

In a market for tea, a poor harvest raises input costs and, at the same time, incomes rise and tea is a normal good. Explain, with reasoning, the effect on equilibrium price and quantity. Then suppose the original supply is Qs = 20 + 6P and demand is Qd = 120 − 4P, and the supply shift reduces supply by 30 units at every price. Find the new equilibrium, ignoring the income change.

Show the solution

The poor harvest raises costs, so supply shifts left. This alone raises price and lowers quantity.
Higher income raises demand for a normal good, so demand shifts right. This alone raises price and raises quantity.
Price rises in both cases, so equilibrium price rises for certain.
Quantity falls from the supply shift and rises from the demand shift, so the net effect depends on which shift is larger.
Numerical part: new supply is Qs = 20 + 6P − 30 = 6P − 10.
Set equal to demand: 120 − 4P = 6P − 10, so 130 = 10P and P* = 13.
Quantity: 120 − 4 × 13 = 68. Check: 6 × 13 − 10 = 68.
Compare with the original equilibrium of ₹10 and 80 units: price rose and quantity fell.

Answer: With both shifts, price rises and the change in quantity is uncertain. For the supply shift alone, the new equilibrium is ₹13 and 68 units, compared with ₹10 and 80 units before.

Exam tips

Use the exact terms 'change in quantity demanded' and 'change in demand'. Examiners reward this precision.
In written answers, draw a clear diagram with labelled axes, curves, and old and new equilibrium points, and then explain it in words.
For numerical questions, show the equating step, the value of P*, and the check on Q*.
Work through the cause and effect chain: event, which curve, which direction, new price and quantity.
When asked about exceptions to the law of demand, name Giffen and Veblen goods, give the reason for each, and say they are rare.

Practice questions from Consumer demand and behaviour

Demand, Supply and Market Equilibrium in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Demand, Supply and Market Equilibrium: frequently asked questions

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

A movement along the curve happens when the good's own price changes. A shift happens when another factor changes, such as income, tastes, or the price of a substitute. The shift moves the whole curve left or right.

How do I find equilibrium price and quantity?

Set quantity demanded equal to quantity supplied and solve for price. Then substitute that price into either equation to get quantity. Check by using the other equation.

What are Giffen and Veblen goods?

A Giffen good is an inferior good where a price rise can increase quantity demanded because the income effect outweighs the substitution effect. A Veblen good is a status good where a higher price increases its appeal. Both are rare exceptions to the law of demand.

What happens to equilibrium when both demand and supply increase?

Quantity rises for certain. The effect on price is uncertain, because it depends on which curve shifts more. If demand shifts more, price rises. If supply shifts more, price falls.