The Price Puzzle: What Drives the Market

Demand and supply and what shifts them, substitutes and complements, market equilibrium, price ceilings and floors, monopoly and market regulators.

Key ideas

• Demand is the quantity buyers are willing and able to buy at a price; by the Law of Demand, a higher price means less is demanded.
• By the Law of Supply, a higher price means sellers offer more.
• Besides price, demand depends on income, tastes and the prices of substitutes and complements; supply depends on technology, the number of sellers and expectations.
• At the equilibrium price quantity demanded equals quantity supplied: a price above it leaves a surplus, a price below it a shortage.
• A price ceiling is a legal maximum (some medicines) and a price floor a legal minimum (a minimum wage); a ceiling set too low can cause shortages.
• A monopoly is a single seller with no close substitutes, so it is regulated.
• Regulators keep markets fair: the RBI for banking, TRAI for telecom and SEBI for the share market.

Remember

Watch out

• Swapping a price ceiling (maximum) and a price floor (minimum).
• Mixing up substitutes (used instead of each other) and complements (used together).
• Saying a surplus pushes prices up: a surplus makes sellers cut prices, a shortage pushes them up.

Worked example