Theory of Demand & Supply — Exam-Ready Cheatsheet
The most-tested chapter of Paper 4. Covers the law, elasticity types, movement vs shift, and equilibrium — typically 6–8 marks every attempt.
Last reviewed: 22 April 2026
Law of demand
- •Other things being equal, quantity demanded varies inversely with price. Q ↑ when P ↓, Q ↓ when P ↑.
- •Demand curve slopes downward from left to right.
- •'Other things' = income, tastes, prices of related goods, future expectations, population.
Exceptions to the law of demand
- •Giffen goods (inferior necessity) — when P ↑, Q demanded ↑.
- •Veblen / conspicuous goods (status symbols) — higher price signals higher status.
- •Future expectations — if price expected to rise, current demand rises despite higher price.
- •Necessaries of life — demand insensitive to price.
Movement vs shift
- •Movement ALONG a demand curve: caused by change in the good's OWN price.
- •SHIFT of the whole curve: caused by change in any OTHER determinant (income, tastes, price of related goods).
- •Right shift = increase in demand. Left shift = decrease.
Elasticity of demand
- •Price elasticity (Ed) = % change in Q demanded / % change in price.
- •Ed > 1: elastic (luxuries). Ed < 1: inelastic (necessities). Ed = 1: unitary.
- •Ed = 0: perfectly inelastic (vertical curve). Ed = ∞: perfectly elastic (horizontal curve).
- •Cross elasticity: substitutes → positive sign; complements → negative sign.
- •Income elasticity: normal good → positive; inferior good → negative; luxury → > 1.
Law of supply & equilibrium
- •Supply curve slopes upward from left to right.
- •Equilibrium: Qd = Qs at market price.
- •Excess demand (Qd > Qs) → price rises. Excess supply (Qs > Qd) → price falls.
Formulas
- Price elasticity (percentage method)
- Ed = (ΔQ/Q) ÷ (ΔP/P)
- Price elasticity (point method)
- Ed = (ΔQ/ΔP) × (P/Q)
- Price elasticity (arc method)
- Ed = ((Q₁ − Q₀) ÷ ((Q₁ + Q₀)/2)) ÷ ((P₁ − P₀) ÷ ((P₁ + P₀)/2))
- Cross elasticity
- Exy = (%ΔQx) / (%ΔPy)
- Income elasticity
- Ey = (%ΔQ) / (%ΔIncome)
Must know before the exam
- ★Slope and elasticity are NOT the same thing. Two curves with the same slope can have different elasticities at different points.
- ★Rectangular hyperbola-shaped demand curve has unitary elasticity everywhere.
- ★Elasticity is always calculated over a range or at a point — always state which.
- ★A linear demand curve has changing elasticity along its length (high at top, low at bottom).
Common mistakes & fixes
- ✗ Using the negative sign of price elasticity in interpretation.
- ✓ We take absolute value for classification (elastic/inelastic). Sign only matters for CROSS elasticity (substitutes vs complements).
- ✗ Calling a shift in demand a 'movement along the curve'.
- ✓ Own-price change = movement. Any OTHER variable's change = shift.
Lock it in with practice
Reading without practising is the #1 reason people forget in the exam. Solve a quick set while this is fresh.