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

This guide follows the AQA AS and A-level Economics specification (version 1.3, 29 June 2022) for the A-level, first taught from September 2015. It covers four parts of the sub-section Price determination in a competitive market, numbered 3.1.3 on the AQA website (the combined PDF prints the A-level version as 4.1.3): the determinants of supply, price elasticity of supply, the determination of equilibrium market prices, and the interrelationship between markets. The demand side and elasticities of demand are taught on other pages. Every number below is invented for illustration.

Read it with the revision notes and the practice questions. For the wider unit, see the overview of individuals, firms, markets and market failure, the AQA A-level Economics hub and the printable checklist. To find weak spots first, use the free 10-minute diagnostics.

Outcomes at a glance

Section	What you must be able to do
The determinants of supply	Explain the supply curve, the profit incentive, causes of shifts, and why the supply curve is the marginal cost curve under perfect competition
Price elasticity of supply	Calculate it, interpret the value, and explain the factors that influence it
Equilibrium market prices	Use demand and supply diagrams; distinguish equilibrium from disequilibrium; explain how excess demand and excess supply change price; know the model’s assumptions
Interrelationship between markets	Explain joint demand, competitive demand, composite demand, derived demand and joint supply, and trace a change in one market to others

The determinants of supply

A supply curve shows the relationship between the price of a good and the quantity producers are willing and able to supply, other things equal. It slopes upwards. A higher price means higher profit per unit (if costs do not move), so firms have an incentive to expand production. Existing firms produce more and new firms may enter.

Under perfect competition the firm’s supply curve is its marginal cost (MC) curve. A price-taking firm maximises profit by producing where price equals marginal cost, so each price tells you the output it supplies.

Output (units)	1	2	3	4	5
MC (£)	4	6	8	10	12

At a price of £8 the firm supplies 3 units, because the third unit costs £8 to make and the fourth would cost £10, more than it earns. At £10 it supplies 4 units and at £12 it supplies 5. Those price and output pairs are points on both the MC curve and the supply curve. If 100 identical firms exist, market supply is 300 units at £8 and 500 at £12: you add quantities at each price.

Causes of shifts in supply

A change in the good’s own price is the only thing that moves you along the curve. Any other cause shifts the whole curve.

• Costs of production (wages, raw materials, energy). Higher costs shift supply left (less supplied at each price); lower costs shift it right.
• Technology. Better methods lower unit costs, shifting supply right.
• Taxes and subsidies. An indirect tax raises costs and shifts supply left (up by the tax per unit); a subsidy shifts it right.
• Number of firms. Entry shifts supply right; exit shifts it left.
• Prices of other goods producers could make. A rise in the price of an alternative product can pull resources away.
• Expectations and natural events. Expected higher future prices may lead producers to hold back stock; drought or flood reduces output.

Worked example (a per-unit tax). In Country A’s market for a good, quantity supplied is Qs = 100 + 60P (P in £). A tax of £2 per unit means firms need £2 more per unit to supply the same amount, so they supply what they previously supplied at (P − 2):

Qs after tax = 100 + 60(P − 2) = −20 + 60P

The curve shifts up by £2 at every quantity (equivalently left by 120 units at every price). The effect on price is worked out in the equilibrium section.

Price elasticity of supply

Price elasticity of supply (PES) measures how responsive quantity supplied is to a change in price.

PES = percentage change in quantity supplied ÷ percentage change in price

PES is normally positive because supply slopes upwards.

Value	Description
0	Perfectly inelastic: quantity does not change
between 0 and 1	Inelastic: quantity changes proportionally less than price
exactly 1	Unit elastic
above 1	Elastic: quantity changes proportionally more than price
infinite	Perfectly elastic: producers will supply any amount at one price

Worked example 1. A small bakery supplies 200 loaves a day at £2.50. When the price rises to £3.00 it supplies 260.

• % change in price = (3.00 − 2.50) ÷ 2.50 × 100 = +20%
• % change in quantity = (260 − 200) ÷ 200 × 100 = +30%
• PES = 30 ÷ 20 = 1.5, so supply is elastic: output rises by 1.5% for each 1% rise in price.

Worked example 2. A wheat farmer sees the price rise 10% but can raise output by only 2% before next harvest. PES = 2 ÷ 10 = 0.2, very inelastic. Land and growing time cannot be changed quickly.

Using PES to predict. If PES is 0.6 and price rises 8%, quantity supplied rises by 0.6 × 8 = 4.8%. From 500 units that gives 500 × 1.048 = 524 units.

Check from an equation. For Qs = 100 + 60P, at P = 8 quantity is 580; at P = 9 it is 640. The price change is 12.5% and the quantity change is 60 ÷ 580 = 10.3%, so PES = 10.3 ÷ 12.5 = 0.83. Elasticity differs along a straight-line supply curve; a straight line through the origin has PES of 1 everywhere.

Factors influencing PES

• Spare capacity. Idle machinery and workers let output rise quickly, so supply is more elastic.
• Stocks of finished goods. Firms holding stock can release it when price rises.
• Time period. Supply is more elastic in the long run, when firms can build capacity and new firms can enter.
• Mobility of factors of production. If workers and capital can switch easily between products, supply is more elastic.
• Ease of entry and production time. Low barriers and quick production help; goods that take a season to grow, or perishable goods that cannot be stored, are inelastic in the short run.

The determination of equilibrium market prices

In a competitive market, equilibrium is the price at which quantity demanded equals quantity supplied, so there is no tendency for price to change. Disequilibrium exists at any other price.

Worked example (Country A). Qd = 900 − 40P and Qs = 100 + 60P.

1. Set Qd = Qs: 900 − 40P = 100 + 60P, so 800 = 100P and P = £8.
2. Qd = 900 − 320 = 580, and Qs = 100 + 480 = 580. Equilibrium quantity = 580.

Draw price up the side and quantity along the bottom; the downward-sloping demand curve crosses the upward-sloping supply curve at (580, £8).

Price	Qd	Qs	Position
£10	500	700	Excess supply of 200
£8	580	580	Equilibrium
£6	660	460	Excess demand of 200

Excess supply (a surplus). Unsold stock builds up, so sellers cut prices. As price falls, quantity demanded extends and quantity supplied contracts until the gap closes. Excess demand (a shortage). Buyers compete for limited goods and sellers can raise prices; price rises, quantity demanded contracts and quantity supplied extends.

Using diagrams to analyse changes in price

Shift one curve, find the new intersection, and describe the change in price and quantity.

Change	New equation	New equilibrium	Effect
Demand rises by 100 at each price	Qd = 1,000 − 40P	£9, 640	Price +12.5%, quantity +10.3%
Supply falls by 100 at each price	Qs = 60P	£9, 540	Price +12.5%, quantity −6.9%
£2 tax on the original supply curve	Qs = −20 + 60P	£9.20, 532	Price +£1.20, quantity −8.3%

In the tax case price rises by £1.20, less than the £2 tax, so buyers bear 60% of it in this example and producers the remainder. The more elastic is supply relative to demand, the more of a tax buyers pay.

The same method works for real markets: housing, a farm crop, concert tickets or a currency. Name the market, identify the cause, decide which curve shifts and in which direction, and then compare equilibria.

Assumptions of the model

• Many buyers and sellers, each a price taker.
• Homogeneous (identical) products.
• Buyers and sellers are rational and well informed.
• Other influences are held constant (ceteris paribus).
• Prices adjust freely and fairly quickly; no government intervention.
• No externalities: private costs and benefits equal social ones.

Evaluation. Many markets have a few large sellers, branded goods or imperfect information; some prices are sticky, set by contract or regulated; adjustment takes time (housing, farming); and behaviour is not always rational. The model is best treated as a benchmark that explains the direction of change.

The interrelationship between markets

A change in one market spreads to others through five links.

Link	Meaning	Example
Joint demand	Goods used together	A rise in the price of printers reduces demand for ink cartridges
Competitive demand	Substitutes	If tea becomes dearer, buyers switch and demand for coffee rises
Composite demand	One good wanted for different uses	Milk for cheese, butter and yoghurt: more demanded for cheese leaves less for butter
Derived demand	Demand for a good arises from demand for another	Bricks are wanted because houses are
Joint supply	One process produces two or more outputs	Beef and hides

Worked example (derived demand). Country A builds 5,000 homes a year, each using 8,000 bricks: demand is 40,000,000 bricks. If a slowdown cuts homebuilding by 12% to 4,400 homes, brick demand falls to 4,400 × 8,000 = 35,200,000, also 12% lower, because the proportion is fixed. Workers, cement and transport are also derived demands.

Worked chain (joint supply). Higher demand for beef raises its price, so farmers raise cattle numbers. Output of hides rises too, which shifts the supply curve of hides right and lowers the price of hides, though the demand for leather has not changed.

Worked chain (multi-market). A poor wheat harvest shifts supply of wheat left, raising its price. Flour costs rise, shifting supply of bread left and raising bread prices. Some buyers switch to rice (a substitute), so its demand and price rise. Mills use less labour, so derived demand for labour falls.

When you write about related markets, show a direction at every step, and state whether you are describing a shift or a movement.

Common errors

• Writing “a shift along the curve” or “a movement of the curve”.
• Calculating PES with the wrong base: percentages use the original value.
• Reading a PES of 0.75 as a 0.75% change in quantity: it is a ratio of two percentage changes.
• Saying that excess supply makes the curve shift. At a price above equilibrium the curves stay put; price moves.
• Giving two separate shifts but no equilibrium comparison.

Official syllabus

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