Demand and Supply: Price Determination Featured

Written by Matt Pringle
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Demand and supply are the foundation of AS micro and form part of unit 1 in the AQA specification. Demand is determined by the consumers' ability and willingness to pay for a good or service. Supply by producers' costs. Where these intersect determines the equilibrium or market clearing price.

The law of demand states that the demand curve will always slope down, i.e. that as the price increases the quantity demanded will decrease. This is caused by 3 factors

  1. Diminishing marginal utility
  2. Income effect
  3. Substitution effect.

Some people have theorised the existence of goods that break this law such as Giffen goods but empirical evidence for these is sparse.

The law of supply states that the supply curve always slopes up due to diminishing marginal returns causing firms' costs of production to rise with the number of units made.

The presentation below gives you a brief reminder about how demand and supply diagrams are put together. It is important that you are careful with axis and labels as otherwise you will not gain full credit in exam answers.

At the bottom of the page you can download a worksheet to save your writing out the tables and drawing the axis.


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