Supply and demand is the model economists use to explain how prices are set in a market. The demand curve shows how much buyers want at each price; it slopes down, because people buy less of something as it gets dearer. The supply curve shows how much sellers will offer at each price; it slopes up, because a higher price makes it worth producing more. Where the curves cross is the equilibrium: the price at which the quantity buyers want equals the quantity sellers offer. If the price is above it, there is a surplus and the price tends to fall; below it, a shortage and the price tends to rise. A change in the good's own price moves you along a curve; anything else shifts the whole curve.

The concert and every number below are invented so the arithmetic stays clean.

One market to follow: tickets for a city's concert run

A band is playing a run of shows in one city, and the promoter can add or drop dates depending on how much each ticket will fetch. Here is what buyers and the promoter would do at five prices.

Plot price on the vertical axis and quantity on the horizontal, and you get the two curves. Price always goes on the vertical axis; examiners check.

Demand slopes down. At 40, fans who would never pay 120 buy a ticket, and some buy two. At 120, only the most devoted are left. This is the law of demand: other things equal, a higher price means a lower quantity demanded.

Supply slopes up. At 40, the promoter can only cover the costs of a couple of shows. At 120, it pays to book extra nights, even in a dearer venue. This is the law of supply.

Equilibrium, and how the market finds it

The curves cross at a price of 80 and a quantity of 6,000. That is the equilibrium price and quantity.

• At 100, there is a surplus. The promoter has 8,000 tickets on sale, only 4,000 people want them, and seats sit unsold. The promoter discounts, and the price falls.
• At 60, there is a shortage. 8,000 people want tickets and only 4,000 exist. Tickets sell out in minutes, people queue online, and resale prices climb. The price is pushed up.

Only at 80 does neither side have a reason to change. Nobody decrees it.

Movements along a curve versus shifts of a curve

This distinction loses more marks than anything else in the topic.

A movement along the curve happens when the good's own price changes. If the promoter raises the price from 80 to 100, quantity demanded falls from 6,000 to 4,000. Demand itself has not changed: the same curve, a different point on it. Call it a change in quantity demanded.

A shift of the curve happens when something other than the good's own price changes, so that at every price, people want (or sellers offer) a different amount. Call it a change in demand or supply.

"Right" means more at every price: the whole curve slides sideways.

Two shifts, worked through

Demand rises. The band wins a big award, and at every price 2,000 more people want tickets. The demand column becomes 12,000, 10,000, 8,000, 6,000 and 4,000. At the old price of 80, demand is now 8,000 against supply of 6,000: a shortage. The price rises until the gap closes. The new equilibrium is a price of 90 and a quantity of 7,000. More tickets sold, at a higher price. Notice that supply did not shift. The promoter moved along the existing supply curve, adding shows because the price rose.

Supply falls. Back to the original demand. Venue costs rise, and at every price the promoter offers 2,000 fewer tickets. Now the new equilibrium is a price of 90 and a quantity of 5,000. Higher price, fewer tickets.

Both shifts raise the price to 90, but one raises the quantity and the other lowers it. That is how you tell which curve moved from real-world data: look at price and quantity together.

A single show: when supply cannot move

Now take one night in one venue with exactly 2,000 seats. However high the price goes, there are 2,000 seats. The supply curve for that show is a vertical line at 2,000. Economists call this perfectly inelastic supply.

With a vertical supply curve, every change in demand shows up entirely in the price. If the band suddenly gets more popular, the quantity cannot rise, so the price must. This is why tickets for a fixed-capacity show swing in price so sharply, and why resale prices for a sell-out can be several times the face value. Dynamic pricing, where the seller raises the price as demand comes in, is an attempt to charge nearer the equilibrium itself.

Price ceilings and floors

Governments, and sometimes sellers, fix prices instead of letting the market find them.

A price ceiling is a legal maximum. It only matters if it is set below equilibrium. Suppose a rule caps the concert run's tickets at 60. From the table, 8,000 people want tickets and the promoter offers 4,000: a shortage of 4,000. Something else now decides who gets a ticket: queues, luck in an online ballot, or a resale market. Rent control is the classic real example, and economists commonly point to shortages of rental housing as its cost.

A price floor is a legal minimum. It only matters if it is set above equilibrium. Suppose tickets could not be sold for less than 100. Supply is 8,000, demand is 4,000: a surplus of 4,000 unsold seats. The classic examples are minimum wages (a floor on the price of labour) and guaranteed minimum prices for farm goods, which in the past led to stockpiles such as the European Community's "butter mountains" of the 1970s and 1980s. How large the effects of a minimum wage are in practice is a live debate among economists, and a good answer says so.

A memory aid: a ceiling is a lid pushed down below the equilibrium, so it causes a shortage; a floor is pushed up above it, so it causes a surplus.

Elasticity in one section

Price elasticity of demand (PED) measures how strongly quantity demanded responds to a change in price:

PED = percentage change in quantity demanded ÷ percentage change in price

From the table, a rise from 80 to 100 is a 25 per cent rise in price. Quantity demanded falls from 6,000 to 4,000, a fall of about 33 per cent. PED is about minus 1.33. Economists often drop the minus sign and speak of the size.

Elasticity tells a seller what a price rise does to revenue. At 80, revenue is 80 × 6,000 = 480,000. At 100, it is 100 × 4,000 = 400,000. Demand is elastic here, so raising the price loses revenue. For an inelastic good, such as petrol in the short run, a price rise increases revenue, which is part of why governments tax it.

Your course may use the midpoint method, which averages the start and end values and gives a slightly different number; use the method your specification uses.

The mistakes that lose marks

• Saying "demand fell" when the price rose. A rise in the good's own price reduces quantity demanded. Demand itself only changes when the curve shifts.
• Shifting both curves for one event. Most events shift one curve. The other side responds by moving along its curve.
• Putting a binding ceiling above equilibrium. A ceiling only bites below the equilibrium; a floor only bites above it.
• Calling the ticket shortage "high demand" alone. The shortage exists because the price is below equilibrium. Raise the price and the shortage disappears.

A scene plan for a four minute video

Supply and demand is a graph that changes, so the video should keep the axes fixed on screen and move only the curves and the dot where they cross. How to explain a graph in a video covers revealing the axes, then the data, then the point.

1. A sold-out concert and a resale site showing three times the face value. The question: why?
2. The empty axes: price up, quantity across.
3. Demand drawn point by point from the table, fans dropping out as the price climbs.
4. Supply drawn point by point, the promoter adding nights.
5. The crossing point at 80 and 6,000, with surplus above and shortage below shaded in.
6. The award: the demand curve slides right, the dot moves up to 90 and 7,000.
7. One venue, 2,000 seats: the supply curve snaps vertical, and the price leaps.
8. A ceiling drawn as a lid at 60, the shortage as a gap.

For the same idea working order by order, how the stock market works, explained visually shows supply and demand setting a share price.

Make your own version

1. 1

   Invent a small market with round numbers

   Concert tickets, bubble tea, used phones. Write a five-row table of prices with quantities demanded and supplied, and check the equilibrium by hand.

2. 2

   Choose one shift and one policy

   One demand or supply shift, and one ceiling or floor. Work the new equilibrium on paper before you write the script, so every number on screen is right.

3. 3

   Write one paragraph per scene

   Follow the scene plan above. About 600 words is four minutes at 150 spoken words a minute. Say plainly that the market and numbers are invented.

4. 4

   Paste the script into openCanviz

   Choose Keep my wording so every number is said as written, set a target length, and pick the whiteboard style so the axes and curves are drawn as you explain them.

5. 5

   Check every curve and label

   Pause on each scene. Drafted graphs can swap the axes, slope a curve the wrong way or shift the wrong curve. Fix any scene in the editor before you present.

If you like making videos like this, how to make a finance explainer channel covers keeping figures dated and staying on the education side.

Common questions

What is the law of supply and demand? Other things equal, buyers want less of a good as its price rises and sellers offer more. The price tends to settle where the two quantities are equal, the equilibrium.

What is the difference between a change in demand and a change in quantity demanded? A change in quantity demanded is a movement along the demand curve caused by the good's own price changing. A change in demand is a shift of the whole curve, caused by something else such as income, tastes or the price of a related good.

What happens when demand increases? If supply is unchanged, the demand curve shifts right, and both the equilibrium price and quantity rise. If supply is fixed, as with seats at one show, only the price rises.

What does a price ceiling do? If it is set below the equilibrium price, it creates a shortage: more people want the good at that price than sellers will offer. Rent control is the common example.

Why do concert tickets sell out so fast? Usually because the face value is set below the price that would match demand to the fixed number of seats. At that price there is a shortage, which shows up as queues, ballots and resale prices well above face value.