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

Related: Topic 2 study guide

Condensed, exam-focused notes for Topic 2 of Cambridge AS & A Level Economics (9708), 2026-2028 series.

2.1 Demand and supply curves

• Movement along a curve: caused only by a change in the good’s own price.
• Shift of a curve: caused by any other determinant — for demand: income, price of related goods, tastes, population; for supply: production costs, technology, number of producers.
• Getting this distinction precise (not just “demand changed”) is what AO1/AO2 reward.

2.2 Price, income and cross elasticity of demand

Measure	Responds to	Sign meaning
PED	Own price	Normally negative (demand curve slopes down), expressing the inverse relationship between price and quantity demanded; size (above or below 1) determines elastic/inelastic
YED	Income	Positive = normal good; negative = inferior good
XED	Price of related good	Positive = substitutes; negative = complements

• Elasticity values: perfectly elastic, (highly) elastic, unitary, (highly) inelastic, perfectly inelastic.
• PED varies along the length of a straight-line demand curve — never treat PED as one fixed number.
• PED links directly to total revenue (the syllabus calls this total expenditure on the product — the same quantity, price times quantity): whether it rises or falls after a price change depends on whether demand is elastic or inelastic at that point.

2.3 Price elasticity of supply (PES)

• Measures how responsive quantity supplied is to a change in price.
• Factors affecting PES: spare capacity, ease of storing stock, time period (supply is more elastic over a longer time).
• Implications: a firm with easily expandable capacity has more elastic supply than one facing a fixed production constraint.

2.4 Interaction of demand and supply

• Equilibrium: price/quantity where demand = supply. Disequilibrium: excess demand or excess supply, creating pressure back toward equilibrium.
• Market relationships: joint demand (complements, e.g. printers/ink), alternative demand (substitutes), derived demand (demand for steel because of demand for cars), joint supply (goods produced together, e.g. beef and leather).
• Price’s three functions: rationing scarce goods, signalling to producers where consumer preferences lie, incentivising producer response.

2.5 Consumer and producer surplus

• Consumer surplus: difference between what consumers are willing to pay and what they actually pay.
• Producer surplus: difference between what producers actually receive and the minimum they would accept.
• Both change with shifts in equilibrium: the more inelastic demand is, the greater the change in consumer surplus for a given supply shift, and the more inelastic supply is, the greater the change in producer surplus for a given demand shift.

Exam technique for this topic

Practise sketching a diagram for every concept in this topic — a shifted curve, a changed equilibrium, a shaded surplus area — since Paper 2 explicitly credits diagrammatic explanation alongside written and numerical answers (AO1 rewards all three forms). Work through elasticity calculation questions for all four measures (PED, YED, XED, PES) until the formulae and, critically, the sign interpretation are automatic — getting a sign backwards (treating a negative XED as substitutes rather than complements, for instance) is one of the most common ways marks are lost on an otherwise well-attempted calculation. When a question asks about the effect of a price change on revenue, always identify whether demand is elastic or inelastic at that specific point on the curve before answering, since the direction of the revenue change depends entirely on that.

Worked calculation approach

For any elasticity calculation, follow the same structure regardless of which of the four measures (PED, YED, XED, PES) is asked for: calculate the percentage change in the dependent variable (quantity demanded or supplied), calculate the percentage change in the independent variable (price, income, or the price of a related good), then divide the first by the second. Only after calculating the numerical coefficient should you interpret it — first by size (is it above or below 1, indicating elastic or inelastic), then by sign (PED is normally negative; YED and XED can be positive or negative). A common source of lost marks is interpreting a coefficient’s meaning before finishing the calculation, or rounding intermediate steps too early and carrying that error through to the final interpretation.

Markets that interact: a worked distinction

Candidates often confuse the four market relationships in 2.4, so hold four separate mental examples: joint demand describes goods bought together, such as a games console and its games — a fall in console price raises demand for both; alternative demand describes substitutes competing for the same purchase, such as two brands of the same product, where a rise in one’s price shifts demand to the other; derived demand describes demand that exists only because of demand for something else, such as demand for steel existing because of demand for cars; and joint supply describes goods that are physically produced together from the same process, such as beef and leather from the same animal, where an increase in supply of one increases supply of the other automatically. Practising which category a given pair of goods falls into, using new examples beyond the syllabus’s own, builds genuine understanding rather than memorised recall of the textbook cases alone.

Self-test

1. What causes a movement along a demand curve, versus a shift of it?
2. What does a negative XED value indicate about two goods?
3. What does a negative YED value indicate about a good?
4. Name the three functions of price in resource allocation.
5. What happens to consumer surplus when demand is highly inelastic and price rises?

Answers: 1. Movement = change in the good’s own price; shift = any other determinant. 2. The goods are complements. 3. The good is inferior. 4. Rationing, signalling, incentivising. 5. Consumer surplus falls sharply, since inelastic demand means quantity barely changes as price rises, so consumers pay much more for close to the same quantity.