The demand curve
The demand curve shows the relationship between price and quantity demanded, all else being equal. It slopes downward: when the price of petrol falls, people drive more and buy more. When the price rises, they drive less and seek alternatives. The steepness of this slope — the price elasticity of demand — varies by product. Demand for insulin is inelastic (people need it regardless of price). Demand for luxury holidays is highly elastic (a small price increase sees large falls in bookings). Shifts in the demand curve (moving the whole line) occur when non-price factors change: income levels, preferences, population, or the price of related goods.
The supply curve
The supply curve slopes upward: higher prices incentivise producers to supply more. At £2 per litre, a petrol station profits comfortably. At £1 per litre, some close. At £3 per litre, more wells get drilled. Supply shifts when production costs change, new technology reduces costs, regulations change, or the number of producers changes. A simultaneous shift in both curves is what makes most real-world price changes complex — the 2021–2023 energy crisis involved both a supply shock (Russia’s gas) and sticky demand, combining to drive prices sharply higher.
Equilibrium and price signals
In a free market, prices continuously adjust toward equilibrium. A shortage (price below equilibrium: demand exceeds supply) causes the price to rise — producers respond by supplying more, consumers demand less, and the market clears. A surplus (price above equilibrium: supply exceeds demand) causes the price to fall until equilibrium is restored. This self-correcting mechanism is sometimes called the "invisible hand" (Adam Smith’s phrase). It relies on prices being able to move freely — when they can’t (price controls, regulated markets), shortages or surpluses persist.
“Supply and demand is the mechanism that coordinates millions of individual decisions without any central authority — the most powerful distributed computing system ever devised.”
What this means for you
Supply and demand is the lens through which to understand almost every price movement you encounter. Why did the house you want to buy cost 40% more this year? Supply of homes is fixed short-term (inelastic supply) while demand rose as mortgage rates fell. Why did oil prices spike in 2022? Supply was cut while demand was recovering. Why do airline tickets bought last-minute cost more? Remaining supply is scarce relative to demand from people who must travel. Once you internalise supply and demand as the default explanation for price changes, economic news becomes dramatically easier to interpret.