Supply and demand is the foundation of introductory economics. Once you understand it, a large part of ECO 101 becomes much easier. This guide explains the core ideas with everyday Nigerian examples.
Demand
Demand is the quantity of a good that buyers are willing and able to buy at different prices over a period of time. Both conditions matter: wanting a car is not demand unless you can pay for it.
The law of demand states that, other things being equal, as the price of a good rises, the quantity demanded falls, and as the price falls, the quantity demanded rises. If the price of a plate of rice at your campus canteen rises from ₦800 to ₦1,200, students buy fewer plates and switch to cheaper meals.
A demand curve slopes downward from left to right on a graph with price on the vertical axis and quantity on the horizontal axis.
Supply
Supply is the quantity that sellers are willing and able to offer at different prices. The law of supply states that, other things being equal, a higher price leads to a higher quantity supplied, because selling becomes more profitable. The supply curve slopes upward.
Movement along a curve versus a shift
This distinction appears in almost every ECO 101 exam.
- A change in the good's own price causes a movement along the curve. This is called a change in quantity demanded or quantity supplied.
- A change in any other factor causes the whole curve to shift. This is called a change in demand or a change in supply.
Factors that shift demand: income, prices of related goods (substitutes and complements), tastes and preferences, population and expectations about future prices.
Factors that shift supply: cost of production (for example fuel or electricity), technology, number of sellers, government taxes or subsidies, weather for agricultural goods, and expectations.
Example: if the price of diesel rises, it costs more to run generators and transport goods, so the supply curve of many products shifts to the left.
Substitutes and complements
Substitutes can replace each other, like garri and rice. If rice becomes expensive, demand for garri rises. Complements are used together, like cars and petrol. If petrol becomes very expensive, demand for cars that use a lot of fuel falls.
Equilibrium
The equilibrium is the price at which quantity demanded equals quantity supplied, where the two curves cross. At this price the market clears: there is no shortage and no surplus.
- If the price is above equilibrium, sellers offer more than buyers want. The result is a surplus, and sellers lower prices to clear their stock.
- If the price is below equilibrium, buyers want more than sellers offer. The result is a shortage, queues form, and prices tend to rise.
Price controls
A price ceiling is a maximum legal price set below equilibrium. It can help buyers in the short term but often causes shortages and black markets. A price floor is a minimum price set above equilibrium, such as a minimum wage in the labour market, and can cause a surplus.
Quick exam checklist
- Label axes: price (P) on the vertical axis and quantity (Q) on the horizontal axis.
- Show the original and new curves clearly and mark the old and new equilibrium points.
- Say whether it is a movement or a shift, and explain why.