AQA A-level Economics: Supply, elasticity, equilibrium and related markets (7136) – Revision Notes

These notes condense four parts of the AQA AS and A-level Economics specification (version 1.3, 29 June 2022) for the A-level, first taught from September 2015: the determinants of supply, price elasticity of supply, the determination of equilibrium market prices, and the interrelationship between markets. The website numbers them 3.1.3 (the combined PDF prints 4.1.3). For full explanations go to the study guide, then test yourself with the practice questions. The AQA A-level Economics hub, the printable checklist and the free 10-minute diagnostics help you plan. All figures are invented for illustration.

Supply: key definitions

Term	Meaning
Supply curve	Price against quantity producers are willing and able to supply, other things equal; slopes upwards
Profit incentive	A higher price means higher profit per unit, so firms expand output and others enter
Supply curve under perfect competition	The firm’s marginal cost curve, because a price taker produces where price equals marginal cost
Market supply	Horizontal sum of firms’ quantities at each price
Movement	Happens when the good’s own price changes, and for no other reason
Shift	Caused by anything else

Shifts: a quick table

Cause	Direction of supply
Higher wages, materials or energy costs	Left
New technology, lower costs	Right
Indirect tax (per unit)	Left (up by the tax)
Subsidy	Right (down by the subsidy)
Entry of firms	Right
Exit of firms	Left
Better price for an alternative product	Left
Drought, flood or disruption	Left
Expected higher future price	Left now (stock held back)

Worked reminder: price equals marginal cost

A price-taking firm has MC of £2, £4, £6, £8 and £10 for units 1 to 5. At a price of £7 it supplies 3 units: the third unit costs £6 (less than £7) and the fourth £8 (more than £7). Repeat for each price and you have the supply curve.

Price elasticity of supply (PES)

PES = % change in quantity supplied ÷ % change in price. Use the original value as the base.

PES	Label	Meaning
0	Perfectly inelastic	Vertical curve
0 to 1	Inelastic	Quantity changes proportionally less than price
1	Unit elastic	Equal proportional change
above 1	Elastic	Quantity changes proportionally more
infinite	Perfectly elastic	Horizontal curve

Method in steps

1. Work out the % change in price and the % change in quantity.
2. Divide quantity change by price change.
3. State the number, then say what it means in context.

Worked reminder 1. A craft brewer’s price rises from £40 to £44 (+10%) and supply from 250 to 255 litres (+2%). PES = 2 ÷ 10 = 0.2: inelastic.

Worked reminder 2. A firm’s price goes from £60 to £66 (+10%) and its output from 300 to 390 (+30%). PES = 30 ÷ 10 = 3: elastic.

Predicting. With PES of 1.2 and a 5% price rise, quantity rises 1.2 × 5 = 6%; from 1,000 units that is 1,060.

Factors that raise PES: spare capacity; stocks of finished goods; long time period; mobile factors of production; low barriers to entry; quick, storable production. Factors that lower it are the opposites: full capacity, perishable output, slow production, specialised resources, the short run.

Why PES matters: a comparison

Suppose demand rises from Qd = 480 − 12P to Qd = 540 − 12P, starting from a price of £20 and quantity of 240. Compare two supply curves that both pass through that point.

Supply curve	PES at £20	New price	New quantity	Price change	Quantity change
Qs = −120 + 18P (elastic)	1.5	£22	276	+10%	+15%
Qs = 180 + 3P (inelastic)	0.25	£24	252	+20%	+5%

The less elastic the supply, the larger the price rise and the smaller the quantity response for the same demand shift. That is why a shortage of spare capacity, or a short time period, makes prices spike. It also explains why supply tends to respond more in the long run than in the short run.

Evaluation prompts for PES questions: the time period considered; whether firms hold stocks; whether the industry can recruit and train labour quickly; how far resources can be redeployed; and whether the price change is expected to last, since firms rarely invest in new capacity for a temporary rise.

Equilibrium and disequilibrium

Equilibrium: quantity demanded equals quantity supplied, and price has no tendency to change. Disequilibrium: any other price.

Worked reminder. Qd = 480 − 12P and Qs = −120 + 18P.

• Equal: 480 − 12P = −120 + 18P, so 600 = 30P and P = £20, quantity 240.
• At £25: Qd = 180, Qs = 330, so excess supply of 150. Sellers cut price, quantity demanded extends and quantity supplied contracts.
• At £15: Qd = 300, Qs = 150, so excess demand of 150. Shortage lets sellers raise price; the reverse adjustments follow.

Shifts. If demand falls to Qd = 420 − 12P, then 420 − 12P = −120 + 18P gives P = £18 and quantity 204: price −10%, quantity −15%.

Subsidy of £5 per unit. Supply becomes Qs = −120 + 18(P + 5) = −30 + 18P. Then 480 − 12P = −30 + 18P gives P = £17 and quantity 276: price −15%, quantity up 15% (from 240 to 276).

Diagram method. (1) Label the axes: price up the side, quantity along the bottom. (2) Draw the original curves and label the equilibrium. (3) Shift one curve in the right direction. (4) Label the new equilibrium. (5) Describe the change in price and quantity in words.

Assumptions of the supply and demand model

Many buyers and sellers who are price takers; identical products; rational, well-informed participants; ceteris paribus; flexible prices; no intervention; no externalities. Limits: firms with market power, branded goods, imperfect information, sticky prices, slow adjustment and irrational behaviour all weaken the model, though it remains a useful benchmark.

Related markets

Term	Key idea	Typical effect of a change in good A’s market
Joint demand	Goods used together	Demand for the partner good falls
Competitive demand	Substitutes	Demand for the rival good rises
Composite demand	One good, several uses	More taken by one use leaves less for others, so the price of the good rises
Derived demand	Wanted for what it helps produce	Demand for inputs moves with demand for the final product
Joint supply	Two outputs from one process	More of one output means more of the other, so its price falls

Worked reminder (derived demand). A factory makes 800 cars a week with 4 tyres each, so 3,200 tyres. If car output falls 10% to 720, tyre demand falls to 2,880, also 10% lower.

Chain-of-reasoning template: cause, which curve shifts, new price and quantity in market 1, link to market 2 (substitute, complement, input, by-product), which curve shifts there, and the new price and quantity.

Must-know distinctions

• Movement along a curve (own price) versus shift of the curve (anything else).
• Excess supply (price above equilibrium) versus excess demand (price below).
• Competitive demand (substitutes) versus joint demand (complements).
• Derived demand (for an input) versus composite demand (for a good with several uses).
• Joint supply (by-products) versus competing uses of resources.

Quick self-test

1. What does the supply curve of a perfectly competitive firm represent?
2. A firm’s MC for units 1 to 5 is £3, £5, £7, £9, £11. How much does it supply at a price of £9?
3. State two causes of a rightward shift in supply.
4. Price rises 8% and quantity supplied rises 2%. Calculate PES and describe it.
5. PES is 3 and price rises 4%. Quantity was 200. What is the new quantity?
6. Give two factors that make supply more elastic.
7. With Qd = 480 − 12P and Qs = −120 + 18P, what is the excess at a price of £25?
8. What happens to price in a market with excess demand, and why?
9. Name two assumptions of the demand and supply model.
10. A factory makes 800 cars a week, 4 tyres each. Car sales fall 10%. What happens to tyre demand?
11. Which relationship links beef and hides?

Answers

1. Its marginal cost curve.
2. Supplies 4 units (MC of £9 is not above price; the fifth costs £11).
3. Lower costs or new technology (also a subsidy or entry of firms).
4. 2 ÷ 8 = 0.25: inelastic.
5. Quantity rises 3 × 4 = 12%, so 200 × 1.12 = 224.
6. Spare capacity and stocks (or mobile factors, long time period).
7. Qd = 180, Qs = 330: excess supply of 150.
8. Price rises, because buyers compete for scarce goods; this extends supply and contracts demand.
9. Price takers, identical goods, perfect information, ceteris paribus (any two).
10. It falls 10%, from 3,200 to 2,880 tyres (derived demand).
11. Joint supply.

Where marks are usually lost

• Writing “supply increases” for a price rise; that is an extension along the curve.
• Calculating a percentage change from the new value instead of the original.
• Stopping at a PES number without interpreting it.
• Drawing a shift but not labelling both equilibria or the axes.
• Explaining excess demand without saying how price then moves.
• Giving factors affecting PES without a reason or context.
• Treating all cross-market links as one-way; check whether the link is substitute, complement, input or by-product.
• Evaluation that lists assumptions without judging how far they hold.

Official syllabus

AQA AS and A-level Economics specification (version 1.3, 29 June 2022), published by AQA, for first teaching from September 2015.