Revise Demand for Cambridge 2281 (2.3)

Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices over a specific period, ceteris paribus. The fundamental law of demand states an inverse relationship exists between price and quantity demanded. As a good's price falls, the quantity demanded rises, and vice versa. This relationship is why the demand curve is downward sloping. This slope is explained by the income effect (a lower price increases the real purchasing power of consumers' income) and the substitution effect (a lower price makes the good relatively cheaper than its substitutes, encouraging consumers to switch). The entire analysis assumes 'ceteris paribus', meaning all other factors affecting demand are held constant.

Supply is the quantity of a good or service that producers are willing and able to offer for sale at various prices over a period, ceteris paribus. The law of supply states a positive relationship between price and quantity supplied. As the market price for a good rises, producers are incentivised to supply more, leading to an increase in quantity supplied. This is primarily driven by the profit motive; a higher price increases the potential profit on each unit sold. Consequently, the supply curve is upward sloping. This reflects the higher price needed to cover the increasing marginal costs of production as output expands and to attract new, potentially less efficient, firms into the market.

Market equilibrium occurs at the price where quantity demanded equals quantity supplied. This point, where the demand and supply curves intersect, determines the market-clearing price (P*) and equilibrium quantity (Q*). At this price, the market is stable with no tendency to change. If the price is above equilibrium, it creates a surplus (excess supply), as producers supply more than consumers demand, leading to downward pressure on price. If the price is below equilibrium, it creates a shortage (excess demand), as consumers demand more than producers supply, leading to upward pressure on price. These price adjustments are the function of the price mechanism, which allocates scarce resources.

It is vital to distinguish between a movement along a curve and a shift of a curve. A movement along the demand or supply curve is caused solely by a change in the good's own price, referred to as a 'change in quantity demanded/supplied'. In contrast, a shift of the entire curve is caused by a change in any non-price factor. For demand, these include changes in income, advertising, or the price of substitutes (use the mnemonic PASIFIC). For supply, factors include costs of production, technology, or government subsidies (use the mnemonic PINTSWC). A rightward shift indicates an increase in demand/supply at every price, while a leftward shift indicates a decrease.