Microeconomics — Fundamentals
The demand curve
The demand curve represents the relationship between a good's price and the quantity buyers are willing to purchase, holding other factors constant — it slopes downward, reflecting the law of demand: as price rises, quantity demanded falls (and vice versa), driven by both the substitution effect (buyers switching to relatively cheaper alternatives) and the income effect (a price rise effectively reducing buyers' real purchasing power). It's essential to distinguish a movement along the demand curve (caused by a price change) from a shift of the entire curve (caused by a change in a non-price factor — income, tastes, prices of related goods, or expectations) — this distinction is one of the most commonly tested conceptual points in introductory microeconomics.
The supply curve
The supply curve represents the relationship between a good's price and the quantity sellers are willing to offer, holding other factors constant — it slopes upward, reflecting the law of supply: as price rises, sellers are willing to supply more (since higher prices make production more profitable at the margin). The same movement-versus-shift distinction applies: a price change causes movement along the supply curve, while a change in input costs, technology, or the number of sellers shifts the entire curve.
Market equilibrium
Equilibrium occurs where the demand and supply curves intersect — the price at which quantity demanded exactly equals quantity supplied, with no inherent tendency for price to change further. At any price above equilibrium, a surplus exists (quantity supplied exceeds quantity demanded), creating downward pressure on price as sellers compete to clear excess inventory; at any price below equilibrium, a shortage exists (quantity demanded exceeds quantity supplied), creating upward pressure on price. This self-correcting tendency toward equilibrium is a core microeconomic mechanism underlying how markets are argued to allocate resources efficiently absent intervention or market failure.
Elasticity — measuring responsiveness
Price elasticity of demand measures how responsive quantity demanded is to a price change, calculated as the percentage change in quantity demanded divided by the percentage change in price. Demand is elastic (elasticity magnitude greater than 1) when quantity demanded changes proportionally more than price — typical for goods with many substitutes or that represent a large share of a buyer's budget. Demand is inelastic (elasticity magnitude less than 1) when quantity demanded changes proportionally less than price — typical for necessities with few substitutes. This distinction matters practically: a seller facing inelastic demand can raise prices with relatively little quantity loss (and total revenue rises), while a seller facing elastic demand faces the opposite tradeoff (total revenue falls if price rises).