Demand is the amount of a good that consumers are willing and able to buy at different prices. The law of demand says that, ceteris paribus, as price falls, quantity demanded increases.
Supply is the amount of a good that producers are willing and able to sell at different prices. The law of supply states that, ceteris paribus, as price rises, quantity supplied increases.
Where the demand and supply curves intersect is the equilibrium price and equilibrium quantity. At this point, the market clears – no excess demand or supply.
Substitutes are goods that can replace each other. When the price of one substitute rises, the demand for the other increases.
The relationship is measured by the cross‑price elasticity of demand:
\$E{xy} = \dfrac{\% \Delta Qx}{\% \Delta P_y}\$
• If \$E_{xy} > 0\$, the goods are substitutes.
• If \$E_{xy} < 0\$, they are complements.
• Label the axes correctly – price on the vertical, quantity on the horizontal.
• Show the shift of the demand curve when the price of a substitute changes.
• Use the sign of \$E_{xy}\$ to explain whether goods are substitutes or complements.
• Remember to state the new equilibrium price and quantity after a shift.
Let’s see how a price change in tea affects coffee demand. The table below shows a snapshot of the market.
| Price of Tea (£) | Quantity of Tea (cups) | Price of Coffee (£) | Quantity of Coffee (cups) |
|---|---|---|---|
| 2.00 | 120 | 3.00 | 80 |
| 1.80 | 140 | 3.00 | 85 |
| 1.50 | 170 | 3.00 | 95 |
Notice how the lower tea price leads to a higher coffee demand – a textbook example of substitutes.
Imagine a playground with two slides – one for coffee and one for tea. If the tea slide becomes steeper (higher price), kids (consumers) will prefer the coffee slide (lower price). The number of kids on each slide changes, just like the quantity demanded changes when prices shift.