A Level Economics: The Price System and the Microeconomy (Cambridge 9708)

This guide covers Topic 2 The Price System and the Microeconomy, the second of six AS Level topics in Cambridge International AS & A Level Economics 9708, for examination 2026-2028.

Where this fits in 9708

Topic 1 established the basic economic problem — scarcity, choice and how different systems allocate resources. Topic 2 builds directly on that by examining the specific mechanism market economies use to allocate resources: the price system. Three key concepts run through this topic — scarcity and choice, equilibrium and disequilibrium, and (via elasticity) the role of time — and it draws on the demand and supply model across a range of real markets, such as primary products, foodstuffs, transport and foreign currency. AS Level candidates study topics 1.1–6.5; A Level candidates additionally study topics up to 11.6, with AS Level content assumed knowledge for A Level Paper 3 and Paper 4.

Syllabus coverage

CAMBRIDGE AS & A LEVEL ECONOMICS 9708 — TOPIC 2: THE PRICE SYSTEM AND THE MICROECONOMY

2.1 Demand and supply curves

• Effective demand; individual and market demand and supply
• Determinants of demand and determinants of supply
• Causes of a shift in the demand curve and causes of a shift in the supply curve
• The distinction between a shift in the demand or supply curve and a movement along these curves

2.2 Price elasticity, income elasticity and cross elasticity of demand

• Definitions of PED, YED and XED, and the formulae for calculating each
• The significance of relative percentage changes, and the size and sign of each coefficient
• Descriptions of elasticity values: perfectly elastic, (highly) elastic, unitary, (highly) inelastic, perfectly inelastic
• Variation in price elasticity of demand along the length of a straight-line demand curve
• Factors affecting PED, YED and XED
• The relationship between price elasticity of demand and total expenditure on a product
• Implications for decision-making of each elasticity measure

2.3 Price elasticity of supply

• Definition of PES, and the formula for calculating it
• The significance of relative percentage changes, and the size and sign of the coefficient
• Factors affecting price elasticity of supply
• Implications for the speed and ease with which firms react to changed market conditions

2.4 The interaction of demand and supply

• Definition of market equilibrium and disequilibrium
• Effects of shifts in demand and supply curves on equilibrium price and quantity
• Relationships between different markets: joint demand (complements), alternative demand (substitutes), derived demand, and joint supply
• Functions of price in resource allocation: rationing, signalling (transmission of preferences) and incentivising

2.5 Consumer and producer surplus

• Meaning and significance of consumer surplus and of producer surplus
• Causes of changes in consumer and producer surplus
• The significance of price elasticity of demand and of supply in determining the extent of these changes

Demand, supply, and what actually shifts a curve

The syllabus places heavy weight on a distinction examiners return to constantly: a movement along a demand or supply curve happens only because of a change in the good’s own price, whereas a shift of the whole curve happens because of a change in any other determinant — for demand, factors such as income, the price of related goods, tastes, or population; for supply, factors such as production costs, technology, or the number of producers. Getting this distinction precise, rather than treating “demand changed” as a single vague idea, is exactly what AO1 and AO2 reward in this topic.

Elasticity: three measures, one shared logic

Price elasticity of demand (PED), income elasticity of demand (YED) and cross elasticity of demand (XED) all measure the same underlying idea — how responsive quantity demanded is to a change in something else — applied to three different “something elses”: a good’s own price, consumer income, and the price of a related good. The syllabus expects candidates to calculate each from its formula, to interpret both the size of the coefficient (how elastic) and its sign (for YED, positive means normal good, negative means inferior good; for XED, positive means substitutes, negative means complements), and to link PED specifically to what happens to a firm’s total revenue when it changes price (the syllabus itself refers to this as total expenditure on the product; the two names describe the same quantity — price times quantity — seen from the seller’s and the buyer’s side respectively). Price elasticity of supply (PES) applies the same responsiveness logic to producers, and is explicitly linked to how quickly and easily firms can adjust output when market conditions change — a firm with easily expandable capacity has more elastic supply than one facing a fixed production constraint.

Elastic, inelastic and unitary — and what moves them

A coefficient’s size places it in one of five bands: perfectly elastic (infinite — any price rise cuts quantity to zero), elastic (magnitude greater than 1 — quantity responds proportionately more than price), unitary (magnitude exactly 1 — quantity and price change by the same proportion, so total expenditure is unchanged by a price change), inelastic (magnitude less than 1 — quantity responds proportionately less than price), and perfectly inelastic (zero — quantity does not change at all). PED also varies along the length of a single straight-line demand curve: it is most elastic near the top left (high price, low quantity) and becomes progressively more inelastic moving down and right, even though the curve’s slope is constant throughout — magnitude, not slope, is what elasticity measures. The syllabus lists the main factors behind each elasticity: for PED, the number and closeness of substitutes, whether the good is a necessity or luxury, the proportion of income it absorbs, and how habit-forming it is; for YED, whether the good is normal or inferior, and how far income has already risen; for XED, how close a substitute or complement the other good is; and for PES, spare capacity, the time period allowed for producers to respond, and how easily inputs and stocks can be adjusted.

Market equilibrium and the price mechanism

Equilibrium is the price and quantity at which demand equals supply; a disequilibrium price leaves either excess demand or excess supply, creating pressure that moves price back toward equilibrium. The syllabus asks candidates to trace how shifts in demand or supply curves change this equilibrium, and to understand markets that interact with each other — joint demand (goods bought together, like printers and ink), alternative demand (substitutes competing for the same purchase), derived demand (demand for a good that exists because of demand for another, like demand for steel because of demand for cars), and joint supply (goods produced together, like beef and leather). This feeds into price’s three functions in resource allocation: rationing scarce goods among those willing to pay, signalling producers about where consumer preferences lie, and incentivising producers to respond to that signal.

Consumer and producer surplus

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay; producer surplus is the difference between what producers actually receive and the minimum they would have accepted. Both change when market equilibrium changes, and the syllabus specifically asks candidates to connect this back to elasticity in two matched cases: the more inelastic demand is, the more a given shift of the supply curve alters the size of consumer surplus, and the more inelastic supply is, the more a given shift of the demand curve alters the size of producer surplus.

Common mistakes

• Confusing a shift with a movement along the curve. Only a change in a good’s own price causes movement along the curve; every other determinant causes a shift.
• Getting elasticity signs backwards. A negative XED means complements, not substitutes; a negative YED means an inferior good, not a normal one.
• Treating PED as a single fixed number for a whole demand curve, when the syllabus explicitly requires understanding that elasticity varies along the length of a straight-line demand curve.
• Forgetting the link between PED and total revenue — a common exam application question asks what happens to revenue following a price change, which depends entirely on whether demand is elastic or inelastic at that point.

How to approach it

Practise sketching diagrams for every concept in this topic — shifting curves, equilibrium changes, and shaded consumer/producer surplus areas — since Paper 2 rewards diagrammatic as well as written explanation (AO1 explicitly credits “written, numerical and diagrammatic forms”). Work through calculation questions for all four elasticity measures until the formulae and sign interpretation are automatic, since this is one of the most heavily tested numerical skills at AS Level.

Related resources

• A Level Economics: Basic Economic Ideas and Resource Allocation (Cambridge 9708)

Official syllabus

Cambridge International, AS & A Level Economics 9708 syllabus for 2026, 2027 and 2028: https://www.cambridgeinternational.org/Images/697423-2026-2028-syllabus.pdf (verified 2026-09-01).