Social StudiesSupply and Demand Set the Market Price
A lively outdoor farmers market on a sunny Saturday morning, with Lumi standing at a produce stall stacked with colorful strawberries, adjusting a chalkboard price sign while gesturing toward a long line of eager customers on one side and a stack of unsold baskets on the other.
- Explain how a price that is too high causes a surplus and pushes prices down.
- Explain how a price that is too low causes a shortage and pushes prices up.
- Identify the equilibrium price as the point where quantity demanded equals quantity supplied.
- Predict the direction prices will move when supply or demand shifts.
- Compare the effects of a shortage and a surplus on market behavior.
Key terms
- Demand
- The relationship between a good's price and the quantity buyers are willing to purchase, moving in opposite directions.
- Supply
- The relationship between a good's price and the quantity sellers are willing to offer, moving in the same direction.
- Equilibrium price
- The price at which the quantity buyers demand exactly equals the quantity sellers supply.
- Surplus
- A situation where quantity supplied exceeds quantity demanded, leaving unsold goods that push prices down.
- Shortage
- A situation where quantity demanded exceeds quantity supplied, causing goods to sell out and pushing prices up.
Two Forces Meet at the Price
Buyers and sellers both watch the price, but they react in opposite directions. A rising price scares off some buyers while drawing in more sellers; a falling price attracts buyers while discouraging sellers. The market price is simply where these two opposing pressures settle. When the amount sellers offer and the amount buyers want finally line up, the market has found its equilibrium and no one has a reason to change the price.
Why Prices Move Back to Equilibrium
A surplus and a shortage are both self-correcting signals. When Rosa has leftover baskets, that surplus tells her the price is too high, so she cuts it next week. When she sells out instantly, that shortage tells her the price is too low, so she raises it. Each adjustment nudges quantity demanded and quantity supplied closer together until they match. This automatic feedback is why economists say markets 'clear' without anyone in charge.
Shifts in Supply or Demand
Equilibrium is not fixed. A heat wave that ruins the strawberry crop shifts supply: at every price fewer baskets exist, so the price climbs to a new, higher equilibrium. A viral recipe that makes strawberries popular shifts demand: more buyers want them at every price, also raising the equilibrium price. Tracing which curve shifts, and in which direction, lets you predict where the new price will land before it gets there.
Worked examples
A baker sells 60 loaves daily at $4 but only sells 35; predict the price change.
- Compare quantities: the baker supplies 60 loaves but buyers demand only 35 at $4.
- Because quantity supplied (60) is greater than quantity demanded (35), there are 25 leftover loaves — a surplus.
- A surplus signals the price is too high, so the baker will lower the price to attract more buyers.
Answer: There is a surplus, so the price will fall toward equilibrium.
A drought cuts the coffee harvest in half while demand stays the same.
- Identify which side changed: the harvest shrank, so supply falls — fewer beans are available at every price.
- At the old price, buyers now demand more coffee than sellers can offer, creating a shortage.
- A shortage pushes the price up until quantity demanded again equals the smaller quantity supplied.
Answer: Supply falls, so the equilibrium price rises.
Activity
Drag each market situation to the correct outcome it produces in the short run.
Practice
A toy is priced so high that stores have shelves full of unsold units; explain what happens to the price and why.
Concert tickets sell out in minutes at the listed price; identify whether this is a shortage or surplus and predict the price direction.
Common mistakes to avoid
- Higher demand lowers the priceWhen more buyers want the same quantity, they compete for it, so higher demand actually pushes the equilibrium price up, not down.
- Equilibrium is the seller's maximum-profit priceEquilibrium is only the price where quantity demanded equals quantity supplied; it is set by buyer and seller behavior, not chosen to maximize one side's profit.
Check your understanding
At the farmers market, Rosa prices strawberries at $8. She brings 50 baskets but buyers only purchase 20. What will most likely happen to the price next week?
Which statement best describes the equilibrium price in a market?
A popular new recipe goes viral and suddenly many more people want to buy strawberries at the farmers market. If supply stays the same, what happens to the equilibrium price?
Recap
Demand and supply respond to price in opposite directions, and the price settles at equilibrium where the two meet. A surplus pushes prices down and a shortage pushes them up, while shifts in supply or demand move equilibrium to a new level entirely.
Reflect
Where in your own life have you seen a price drop because a store had too much unsold inventory?