individual and market demand and supply

Demand and Supply – Individual & Market (Cambridge IGCSE / A‑Level)

Learning objectives

• Define and distinguish between individual (private) demand and market demand.
• Define and distinguish between individual (private) supply and market supply.
• Explain the law of demand and the law of supply and represent them graphically.
• Identify all non‑price determinants that cause shifts in the demand and supply curves.
• Derive market demand and market supply by aggregating individual curves.
• Analyse the effect of a shift in either demand or supply on equilibrium price and quantity.
• State and interpret the formulas for price, income and cross‑price elasticity of demand and for price elasticity of supply.
• Explain consumer surplus and producer surplus and illustrate them on a diagram.
• Understand the role of price controls and the basic reasons for government intervention.

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0. Basic Economic Ideas & Resource Allocation (Syllabus 1.1‑1.6)

These concepts provide the foundation for the price‑system analysis.

• Scarcity & choice: Resources are limited; societies must decide how to allocate them among alternative uses.
• Opportunity cost: The value of the next best alternative foregone when a choice is made.
• Factors of production: Land, labour, capital and entrepreneurship.
• Economic systems: Market (price) economy, command economy, mixed economy.
• Production Possibility Curve (PPC): Shows the maximum output combinations of two goods; illustrates efficiency, inefficiency and economic growth.
• Classification of goods: Private vs. public, normal vs. inferior, substitutes vs. complements, merit vs. demerit.
• The margin: Decision‑making is based on the additional (marginal) benefit and cost of one more unit.
• Time: Short‑run vs. long‑run decisions affect the shape of supply curves.

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1. Individual (private) demand

The individual demand curve shows the relationship between the price of a good (P) and the quantity demanded by a single consumer (Q_Di), holding all other factors constant (ceteris paribus).

• Derived from the consumer’s utility‑maximising behaviour.
• Downward sloping because of diminishing marginal utility – as price falls the consumer can afford more units that give less additional satisfaction.

Functional form (simplified):

$$Q_{Di}=f(P,\;Y,\;P_{r},\;T,\;E)$$

• Y – consumer’s income.
• P_r – price of related goods (substitutes or complements).
• T – tastes and preferences.
• E – expectations about future prices or income.

Example

If the price of a cup of coffee falls from £3 to £2, a student who values each extra cup at more than £2 will buy more cups, moving down the demand curve.

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2. Market demand

Market demand is the horizontal summation of the individual demand curves of all consumers in the market.

If there are n consumers:

$$Q_D=\sum_{i=1}^{n}Q_{Di}$$

The market demand curve is also downward sloping, reflecting the aggregate effect of the law of demand.

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3. Individual (private) supply

The individual supply curve shows the relationship between the price of a good (P) and the quantity supplied by a single firm (Q_Si), ceteris paribus.

• Upward sloping because higher prices raise marginal revenue and make it worthwhile to produce additional units whose marginal cost is rising.

Functional form (simplified):

$$Q_{Si}=g(P,\;C,\;T_s,\;E_s)$$

• C – input costs (wages, raw materials, etc.).
• T_s – technology or productivity of the firm.
• E_s – expectations about future prices.

Example

A wheat farmer will increase the area planted when the market price of wheat rises from £150 to £180 per tonne because the extra revenue covers the higher marginal cost of the additional land and labour.

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4. Market supply

Market supply is the horizontal summation of the supply curves of all firms operating in the market.

If there are m firms:

$$Q_S=\sum_{j=1}^{m}Q_{Sj}$$

The market supply curve is upward sloping, reflecting the aggregate response of firms to price changes.

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5. Determinants of demand and supply (shifts)

Any change in a non‑price determinant shifts the whole curve; a change in the good’s own price causes a movement along the curve.

Demand determinants	Effect on demand curve	Supply determinants	Effect on supply curve
Consumer income (normal vs. inferior goods)	Normal good → rightward shift; Inferior good → leftward shift	Input prices (wages, raw materials)	Higher costs → leftward shift; Lower costs → rightward shift
Prices of related goods (substitutes & complements)	Substitutes: price rise → rightward shift; Complements: price rise → leftward shift	Technology / productivity	Improved technology → rightward shift; Out‑of‑date technology → leftward shift
Tastes and preferences	More favourable tastes → rightward shift	Number of firms in the market	More firms → rightward shift; Fewer firms → leftward shift
Expectations of future price or income	Expected price rise → current demand leftward (delay purchase); Expected income rise → rightward shift	Expectations of future price	Expected price rise → current supply leftward (delay production)
Population size / market size	Growth → rightward shift; Decline → leftward shift	Government policy (taxes, subsidies, regulation)	Tax on the good → leftward shift; Subsidy → rightward shift; Regulation that raises compliance cost → leftward shift

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6. Elasticities

6.1 Price elasticity of demand (PED)

$$\varepsilon_{P}^{D}= \frac{\%\Delta Q_D}{\%\Delta P}$$

• Elastic demand (|ε| > 1): quantity changes proportionally more than price.
• Inelastic demand (|ε| < 1): quantity changes proportionally less than price.
• Unit‑elastic (|ε| = 1): proportional change.

Typical values: luxury goods – elastic; essential goods – inelastic; goods with many close substitutes – elastic.

6.2 Income elasticity of demand (YED)

$$\varepsilon_{Y}^{D}= \frac{\%\Delta Q_D}{\%\Delta Y}$$

• Positive → normal good.
• Negative → inferior good.

6.3 Cross‑price elasticity of demand (XED)

$$\varepsilon_{P_r}^{D}= \frac{\%\Delta Q_D}{\%\Delta P_r}$$

• Positive → substitutes.
• Negative → complements.

6.4 Price elasticity of supply (PES)

$$\varepsilon_{P}^{S}= \frac{\%\Delta Q_S}{\%\Delta P}$$

• Highly elastic supply when firms can increase output quickly (e.g., services, digital products).
• Inelastic supply when production relies on fixed factors in the short run (e.g., agricultural land, heavy plant).

These formulas will be used in later lessons to quantify the size of shifts shown in diagrams.

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7. Market equilibrium

Equilibrium occurs where market demand equals market supply:

$$Q_D = Q_S$$

The corresponding price is the equilibrium price P* and the quantity is Q*.

7.1 Effect of a demand shift

7.2 Effect of a supply shift

7.3 Simultaneous shifts

If both curves shift, the direction of the new equilibrium price depends on the relative magnitude of the shifts, while the direction of the new equilibrium quantity is determined by the combined direction of the two shifts.

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8. Consumer and producer surplus (welfare)

These are the standard measures of economic welfare used in the Cambridge syllabus.

• Consumer surplus (CS): Difference between what consumers are willing to pay (the demand curve) and what they actually pay (the market price). Graphically, the area above the price line and below the demand curve.
• Producer surplus (PS): Difference between the price firms receive and the minimum price at which they are willing to supply (the supply curve). Graphically, the area below the price line and above the supply curve.

When a policy such as a tax or a price ceiling is introduced, the change in CS and PS can be measured; the loss that is not transferred to anyone is the dead‑weight loss.

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9. Movements along a curve vs. shifts of a curve

1. Movement along a curve – caused by a change in the price of the good itself.
   • Higher price → move up the supply curve (greater Q_S).
   • Higher price → move down the demand curve (lower Q_D).
2. Shift of the curve – caused by a change in any non‑price determinant.
   • Shift right = increase in quantity at every price.
   • Shift left = decrease in quantity at every price.

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10. Price controls (preview for Topic 3)

Governments sometimes intervene directly in markets by setting legal limits on prices.

Control	Definition	Typical effect on equilibrium	Potential welfare outcome
Price ceiling	Maximum legal price (e.g., rent control)	Set below P* → creates excess demand (shortage)	Consumer surplus may rise for some buyers, but total CS falls; producer surplus falls; dead‑weight loss appears.
Price floor	Minimum legal price (e.g., minimum wage)	Set above P* → creates excess supply (surplus)	Producer surplus may rise for some sellers, but total PS falls; consumer surplus falls; dead‑weight loss appears.

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11. Government micro‑economic intervention (Topic 3 preview)

Three main reasons for government action and six common instruments.

Reasons for intervention

1. Public goods – non‑rival and non‑excludable (e.g., national defence).
2. Merit and demerit goods – goods that society believes are under‑ or over‑consumed (e.g., education, tobacco).
3. Market failure – externalities, information asymmetry, monopoly power.

Instruments

Instrument	How it works	Typical impact on demand or supply
Tax	Levy on producers or consumers	Shifts supply left (tax on producers) or demand left (tax on consumers).
Subsidy	Payment to producers or consumers	Shifts supply right (producer subsidy) or demand right (consumer subsidy).
Price ceiling / floor	Legal maximum or minimum price	Creates a price‑controlled quantity that differs from the market‑determined equilibrium.
Quota	Limit on the quantity that can be produced or imported	Effectively shifts supply left.
Direct provision	Government produces the good itself	Increases total market supply.
Information / regulation	Labelling, standards, bans	Can shift demand (e.g., health warnings) or supply (e.g., safety standards).

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12. Next lesson – The macro‑economy (AS) (Topic 4 preview)

Having mastered the micro‑economic price system, the course moves to the national‑level analysis.

• National‑income accounting – GDP, GNP, components of aggregate demand.
• Aggregate demand (AD) and aggregate supply (AS) – short‑run vs. long‑run curves.
• Economic growth, unemployment, inflation and the policy mix (fiscal & monetary).
• Linking micro‑foundations (price mechanisms) to macro‑outcomes.

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13. Summary checklist (exam‑ready)

• Individual demand: downward sloping, Q_Di=f(P,…).
• Market demand: horizontal sum of all Q_Di, also downward sloping.
• Individual supply: upward sloping, Q_Si=g(P,…).
• Market supply: horizontal sum of all Q_Si, also upward sloping.
• Non‑price determinants (income, related‑good prices, tastes, expectations, population, input costs, technology, number of firms, government policy) shift curves.
• Elasticity formulas quantify responsiveness; remember sign conventions.
• Equilibrium where Q_D = Q_S; a rightward demand shift raises P* and Q*, a rightward supply shift lowers P* and raises Q*.
• Consumer surplus = area above price & below demand; Producer surplus = area below price & above supply.
• Price controls (ceilings/floors) create shortages or surpluses and generate dead‑weight loss.
• Government intervenes for public goods, merit/demerit goods, and market failures using taxes, subsidies, controls, quotas, direct provision, and information policies.
• Next step: apply these ideas to the macro‑economy (AD/AS, growth, unemployment, inflation).