Understanding Supply and Demand in IB Economics
In IB Economics, supply and demand are the foundation of microeconomics — explaining how prices and quantities of goods and services are determined in a market. These forces interact to create market equilibrium, where supply equals demand.
Mastering supply and demand is essential for Paper 1 essays and Paper 3 quantitative analysis. Every economic system, from free markets to mixed economies, depends on these principles to allocate scarce resources efficiently.
The Law of Demand | Consumer Behavior in IB Economics
The law of demand states that, ceteris paribus (all else equal), when the price of a good decreases, the quantity demanded increases — and when the price rises, demand falls.
Why Demand Slopes Downward
- Substitution effect: As prices fall, consumers switch from more expensive alternatives to the cheaper good.
- Income effect: A lower price increases consumers’ real purchasing power.
- Diminishing marginal utility: The additional satisfaction gained from consuming extra units declines, so consumers buy more only at lower prices.
Non-Price Determinants of Demand
Demand can shift due to factors other than price:
- Changes in income
- Consumer preferences and tastes
- Prices of substitutes or complements
- Population size and demographics
- Future expectations
A rightward shift means increased demand at all price levels, while a leftward shift means reduced demand.
The Law of Supply | Producer Behavior in IB Economics
The law of supply states that, ceteris paribus, when the price of a good increases, producers are willing to supply more — and when the price falls, they supply less.
Why Supply Slopes Upward
- Higher prices increase profitability and incentivize production.
- Rising output allows firms to cover marginal costs.
- More producers may enter the market as prices rise.
Non-Price Determinants of Supply
Supply shifts occur due to:
- Input costs (wages, materials, energy)
- Technology improvements
- Government taxes or subsidies
- Producer expectations
- Number of firms in the market
Market Equilibrium | The Intersection of Supply and Demand
Market equilibrium occurs where quantity supplied equals quantity demanded.
- The equilibrium price (Pe) is where the market clears — no surplus or shortage exists.
- The equilibrium quantity (Qe) is the amount traded at that price.
If the price is above equilibrium, a surplus occurs (excess supply). If it’s below equilibrium, a shortage occurs (excess demand).
IB students should be able to draw and label market diagrams showing shifts in supply and demand and explain how markets return to equilibrium — a common Paper 1 diagram-based essay question.
Supply and Demand in IB Economics Analysis
These concepts extend beyond simple goods to labor markets, foreign exchange, and global trade. Understanding supply and demand helps IB students analyze:
- Government interventions (price floors, ceilings, and subsidies)
- Market failures (externalities and public goods)
- Elasticities (responsiveness to price changes)
Through RevisionDojo’s IB Economics course, students can access interactive diagrams, video walkthroughs, and essay templates that make mastering these foundational concepts straightforward and exam-ready.
FAQs
What is the law of demand in IB Economics?
As price decreases, the quantity demanded increases, assuming all other factors remain constant.
What is the law of supply?
As price increases, producers are willing and able to supply more of a good or service.
What happens when supply and demand intersect?
That point determines the market equilibrium — where there’s no shortage or surplus.
