AQA GCSE Economics: Equilibrium price, revenue and intermarket links (8136) – Revision Notes

These notes condense sections 3.1.3.3 (Equilibrium price) and 3.1.3.4 (Intermarket relationships) of the AQA GCSE Economics (8136) specification, for first teaching from September 2017. The specification marks no tiers. For full explanations and worked examples, read the study guide. Then test yourself with the practice questions.

Other links: course hub, printable checklist, How Markets Work revision notes and the free 10-minute diagnostics.

All figures are invented and illustrative (a made-up Town B), not real statistics.

Key definitions

Term	Meaning
Equilibrium price	The price where quantity demanded equals quantity supplied
Equilibrium quantity	The quantity traded at the equilibrium price
Excess demand	Quantity demanded is greater than quantity supplied; the price is below equilibrium
Excess supply	Quantity supplied is greater than quantity demanded; the price is above equilibrium
Revenue	Price multiplied by quantity sold
Substitutes	Goods that can replace each other (tea and coffee)
Complements	Goods used together (printers and ink)

Reading the equilibrium (3.1.3.3)

A market for lunch boxes in Town B:

Price (£)   Demanded   Supplied   Gap
   4          440         80      +360
   6          360        120      +240
   8          280        160      +120
  10          200        200         0
  12          120        240      -120
  14           40        280      -240

• Equilibrium: £10 and 200 lunch boxes.
• At £6: excess demand of 240. At £14: excess supply of 240.
• Method: find the row where the two columns match. On a diagram, find where the curves cross.

Price adjustment

Excess demand chain: buyers compete, sellers see shortages, price rises, quantity supplied rises, quantity demanded falls, gap closes.

Excess supply chain: unsold stock builds, sellers cut price, quantity supplied falls, quantity demanded rises, gap closes.

The curves stay where they are. The adjustment is a movement along both curves.

Changes in equilibrium

Four steps: which curve, which direction, what appears at the old price, new price and quantity.

Change	Old price gives	Price	Quantity
Demand up	Excess demand	Up	Up
Demand down	Excess supply	Down	Down
Supply up	Excess supply	Down	Up
Supply down	Excess demand	Up	Down

Worked reminder 1. A shift in fashion cuts demand by 120 lunch boxes at every price. At £10, demand is now 80 against 200 supplied, so there is excess supply of 120. The price falls to £8, where demand is 160 and supply is 160. New equilibrium: £8 and 160 lunch boxes.

Worked reminder 2. A new factory raises supply by 60 lunch boxes at every price. At £10, supply is 260 against demand of 200, so there is excess supply of 60. The price falls to £9, where both are 240. New equilibrium: £9 and 240 lunch boxes.

If both curves shift, one of price or quantity is certain. In the two reminders above applied together (demand down 120, supply up 60), price falls to £7 but the quantity stays at 200. Without the numbers you could only say price falls and quantity is uncertain.

Revenue on the diagram

Revenue is the rectangle from the origin to the equilibrium point: price x quantity.

Situation	Price	Quantity sold	Revenue
Original	£10	200	£2,000
Demand down 120	£8	160	£1,280
Supply up 60	£9	240	£2,160

Away from equilibrium, quantity sold is the smaller of the two quantities. At £6, supply is the smaller, 120, so revenue is 6 x 120 = £720. At £14, demand is the smaller, 40, so revenue is 14 x 40 = £560. Both are below £2,000.

For a single firm, use the firm’s own price and output, not the market’s.

Applying it to real markets

• Seasonal goods: supply rises at harvest, so the price falls.
• Fixed-capacity events: supply is vertical, so a rise in demand changes only the price.
• Rising costs: supply shifts left, so price rises and quantity falls.
• Always name the good, the buyers, the sellers and the cause of the shift.

Complements and substitutes (3.1.3.4)

Price of good A	Demand for a substitute of A	Demand for a complement of A
Rises	Rises	Falls
Falls	Falls	Rises

Chain example: poor harvest, coffee supply falls, coffee price rises, quantity of coffee demanded falls (a movement), tea demand rises (a shift right), milk demand falls (a shift left).

Related markets also react to changes in demand. If demand for a console rises, the console price tends to rise, and demand for the games used on it rises as well.

On the supply side, if a farmer can grow either wheat or barley, a higher wheat price shifts barley supply left.

Diagram checklist

• Both axes labelled: price up the side, quantity along the bottom.
• Demand slopes down and supply slopes up, each labelled D and S.
• The original equilibrium is marked with its price and quantity.
• A shifted curve gets a new label (D2 or S2) and an arrow showing the direction.
• The new equilibrium is marked, with its own price and quantity.
• Any revenue rectangle is shaded and labelled price x quantity.

Related markets with numbers

A short numerical chain for a made-up Town B. Suppose bus fares and train fares are substitutes, and the train market has demand of 700 minus 50 times the price, and supply of 100 plus 50 times the price.

• Equilibrium: 600 = 100P, so the price is £6 and the quantity is 400 journeys.
• Bus fares rise and demand for train journeys rises by 100 at every price, so demand becomes 800 minus 50 times the price.
• New equilibrium: 700 = 100P, so the price is £7 and the quantity is 450 journeys.
• Train revenue rises from 6 x 400 = £2,400 to 7 x 450 = £3,150.

Now take cars and fuel as complements. If a tax makes cars dearer, fewer cars are bought. Demand for fuel shifts left, so the fuel price and quantity fall. Stating each step in order makes the chain clear and earns credit.

Supply-side links between markets

Producers decide what to make, and that links markets too.

• If wheat becomes more profitable, farmers plant more wheat and less barley, so barley supply shifts left and the barley price rises.
• A rise in the price of an input, such as flour, shifts the supply of bread left. The bread market then shows a higher price and a lower quantity.

Must-know distinctions

• A movement along a curve is caused by the good’s own price; any other cause shifts the curve.
• Excess demand (price below equilibrium) versus excess supply (price above equilibrium).
• Revenue (price x quantity) versus profit (revenue minus costs).
• Substitute (a rise in A’s price raises demand for B) versus complement (a rise in A’s price lowers demand for B).

Method in steps: a related-markets question

1. Name the market where the first change happens and say what shifts or moves there.
2. State the effect on the price in that market.
3. Say whether the second good is a substitute or a complement.
4. Say which way its demand curve shifts, and the effect on its price and quantity.
5. Link back to the context.

Quick self-test

1. In the lunch box table, what is the equilibrium price and quantity?
2. State the excess at £6 and say which type it is.
3. State the excess at £14 and say which type it is.
4. Calculate revenue at equilibrium.
5. Demand falls by 120 at every price. Find the new equilibrium.
6. Calculate the new revenue from question 5.
7. Now suppose supply, not demand, rises by 60 at each price. Give the new equilibrium and the revenue.
8. Calculate revenue if the price were fixed at £6.
9. The price of bus tickets rises. What happens to demand for train tickets (a substitute)?
10. The price of games consoles falls. What happens to demand for console games?

Answers

1. £10 and 200 lunch boxes.
2. Quantity demanded 360 minus supplied 120 = 240; excess demand.
3. Supplied 280 minus demanded 40 = 240; excess supply.
4. 10 x 200 = £2,000.
5. £8 and 160 lunch boxes.
6. 8 x 160 = £1,280.
7. £9 and 240 lunch boxes; revenue 9 x 240 = £2,160.
8. Only 120 are supplied, so 6 x 120 = £720.
9. It rises (shifts right).
10. It rises (shifts right), because the two goods are complements.

Where marks are usually lost

• Describing a shift but never saying what happens at the old price.
• Giving the price change without the quantity change.
• Calling a fall in quantity demanded a fall in demand.
• Drawing revenue as the area under the curve instead of the price x quantity rectangle.
• Mixing up complements and substitutes in the direction of the shift.
• Forgetting to label both axes and the new equilibrium on a diagram.
• Answering in general terms with no link to the market in the question.
• Writing numbers without units, such as £ or the number of lunch boxes.

Official syllabus

AQA GCSE Economics (8136) specification, for first teaching from September 2017, published by AQA. Sections 3.1.3.3 and 3.1.3.4.