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

This guide covers 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, so everything here is common content. It sits in section 3.1, How markets work, which is assessed in Paper 1. It assumes you already know how demand and supply curves are drawn and why they shift; those points are taught separately, as is the calculation of elasticity.

All figures below are invented and illustrative. They describe made-up markets in a made-up Town A and are not real statistics.

Related pages: course hub, printable checklist, revision notes, practice questions, the wider How Markets Work guide and the free diagnostics.

What you must be able to do

Spec reference	Outcome
3.1.3.3	Explain how supply and demand interact to set the equilibrium price on a diagram
3.1.3.3	Explain why excess demand and excess supply lead to price changes
3.1.3.3	Use diagrams to show how equilibrium price changes when demand or supply changes
3.1.3.3	Apply demand and supply curves to a variety of real-world markets
3.1.3.3	Show a producer’s revenue on a demand and supply diagram
3.1.3.4	Define complements and substitutes
3.1.3.4	Explain how changes in demand, supply and price in one market affect related markets

Equilibrium price

A market is in equilibrium when the quantity buyers want to buy at a price equals the quantity sellers want to sell. The price where this happens is the equilibrium price, and the amount bought and sold at it is the equilibrium quantity. On a diagram, price is on the vertical axis and quantity on the horizontal axis. Equilibrium sits at the point where the demand curve, sloping down, cuts the supply curve, sloping up.

Here is a weekly market for bunches of flowers in Town A (illustrative).

Price (£)   Quantity demanded   Quantity supplied   Gap (demanded - supplied)
   6             280                 100                 +180
   8             240                 120                 +120
  10             200                 140                  +60
  12             160                 160                    0
  14             120                 180                  -60
  16              80                 200                 -120
  18              40                 220                 -180

The two columns match only at £12, so the equilibrium price is £12 and the equilibrium quantity is 160 bunches. You read it off a diagram in the same way: go to the crossing point, then across to the price axis and down to the quantity axis.

Excess demand and excess supply

If the price is not at equilibrium, the market is in disequilibrium.

Excess demand (a shortage) happens when the price is below equilibrium and quantity demanded is greater than quantity supplied. At £8, buyers want 240 bunches but sellers offer only 120, so excess demand is 120 bunches.

The price adjusts like this:

1. Some buyers cannot get flowers, so they are willing to pay more.
2. Sellers see queues and empty shelves and raise the price.
3. A higher price extends supply (a movement up the supply curve) and cuts quantity demanded (a movement up the demand curve).
4. The gap shrinks until it closes at £12.

Excess supply (a surplus) happens when the price is above equilibrium and quantity supplied is greater than quantity demanded. At £16, sellers offer 200 bunches but buyers want 80, so excess supply is 120 bunches.

The price adjusts in the opposite direction:

1. Sellers are left with unsold stock.
2. They cut the price, run offers or reduce orders.
3. The lower price cuts quantity supplied and raises quantity demanded.
4. The surplus disappears at £12.

Notice that the curves do not move during this process. Only the price and the quantities along the curves change.

Changes in equilibrium

When a factor other than the good’s own price changes, a curve shifts. The old equilibrium is no longer where the curves cross, so excess demand or excess supply appears and the price moves to a new equilibrium.

Method for any diagram question:

1. State which curve shifts, and the cause.
2. State the direction (right means an increase, left means a decrease).
3. Say what appears at the old price (excess demand or excess supply).
4. State the new equilibrium price and quantity.

Worked example 1: demand rises. A local food fair makes fresh flowers fashionable. Demand rises by 60 bunches at every price, so demand becomes 460 minus 20 times the price. At £12, buyers now want 220 but sellers still offer 160, so there is excess demand of 60. The price rises. At £14, buyers want 180 and sellers offer 180. The new equilibrium is £14 and 180 bunches.

Worked example 2: supply falls. A wet summer cuts the growers’ output by 30 bunches at every price. At £12 there are now 130 bunches on offer against 160 wanted, so excess demand is 30. The price rises. At £13, buyers want 140 and sellers offer 140. The new equilibrium is £13 and 140 bunches. Price rose and quantity fell.

Worked example 3: supply rises. New growers enter and output rises by 60 bunches at every price. At £12, supply is 220 against demand of 160, so there is excess supply of 60. The price falls. At £10, demand is 200 and supply is 200. The new equilibrium is £10 and 200 bunches. Price fell and quantity rose.

Summary of the four basic cases:

Change	Excess at old price	New price	New quantity
Demand rises	Excess demand	Up	Up
Demand falls	Excess supply	Down	Down
Supply rises	Excess supply	Down	Up
Supply falls	Excess demand	Up	Down

If both curves shift at once, you can be sure of the direction of one variable (price or quantity) but not the other without the numbers.

Applying the model to real markets

Any market with many buyers and sellers can be sketched this way. Define the market, name the curves, and then follow the method above.

• A seasonal fruit market (illustrative). When the harvest arrives, supply shifts right, giving a surplus at the old price, so the price falls and quantity sold rises. This is why such fruit is cheaper in season.
• A popular event. The number of seats is fixed, so supply is a vertical line. A rise in demand cannot raise quantity, so the whole adjustment is in price, and tickets can sell for far more than their face value if sold on.
• A market hit by a rise in costs. Higher wages or raw material costs shift supply left, raising the equilibrium price and cutting the quantity sold.

Always tie your answer to the context given. Say what the good is, who the buyers and sellers are, and what has changed.

Revenue on a demand and supply diagram

A producer’s revenue is the price received multiplied by the quantity sold. On a diagram, revenue at the equilibrium is the area of the rectangle with corners at the origin, the equilibrium quantity along the bottom, the equilibrium point, and the equilibrium price up the side.

Price
  |  \D            /S
  |   \           /
12|----+--------X
  |####|########|
  |####|########|
  +----+--------+----- Quantity
                160
Shaded area = 12 x 160 = £1,920

Revenue (£) at each equilibrium above:

Market	Price	Quantity	Revenue
Original	£12	160	12 x 160 = £1,920
Demand rises (example 1)	£14	180	14 x 180 = £2,520
Supply falls (example 2)	£13	140	13 x 140 = £1,820
Supply rises (example 3)	£10	200	10 x 200 = £2,000

Compare the rectangles to see which is larger. The rectangle is the revenue of all sellers together in the market. For one firm, you would use that firm’s own price and quantity.

Revenue away from equilibrium. The quantity actually traded is the smaller of quantity demanded and quantity supplied, because a sale needs both a buyer and a seller. At £16, only 80 bunches are bought, so revenue is 16 x 80 = £1,280, which is less than £1,920. At £8, only 120 bunches are offered, so revenue is 8 x 120 = £960.

Complements and substitutes

Substitutes are goods that can be used in place of each other, such as tea and coffee. Complements are goods that are used together, such as coffee and milk, or a printer and its ink.

If this happens in market A	Substitute market B (demand)	Complement market B (demand)
Price of A rises	Demand for B rises	Demand for B falls
Price of A falls	Demand for B falls	Demand for B rises

Two things happen at once. In market A, the rise in its own price causes a movement along its demand curve (quantity demanded falls). In market B, the demand curve itself shifts.

Changes in related markets

A change in one market can start a chain. Here are three illustrative markets in Town A.

Coffee (£ per bag). Demand is 640 minus 40 times the price and supply is 40 plus 40 times the price. The equilibrium is £7.50 and 340 bags. A poor harvest cuts supply by 80 bags at every price. Supply is now minus 40 plus 40 times the price, and the new equilibrium is £8.50 and 300 bags.

Tea (a substitute), £ per box. Demand is 500 minus 40 times the price and supply is 100 plus 60 times the price. The equilibrium is £4 and 340 boxes. The dearer coffee pushes some buyers to tea, so demand rises by 50 boxes at every price. The new equilibrium is £4.50 and 370 boxes. Tea price up, tea quantity up.

Milk (a complement), £ per crate. Demand is 600 minus 20 times the price and supply is 120 plus 20 times the price. The equilibrium is £12 and 360 crates. Fewer coffees are bought, so demand for milk falls by 40 crates at every price. The new equilibrium is £11 and 340 crates. Milk price down, milk quantity down.

The chain in words: poor coffee harvest, supply of coffee falls, coffee price rises, quantity of coffee demanded falls (a movement), demand for tea rises (a shift right) and demand for milk falls (a shift left).

Supply can also link markets. A farmer who can grow wheat or barley will respond to a higher wheat price by planting more wheat, so supply of barley falls. A change in demand in one market therefore reaches the other through the producer’s choice.

Common errors

• Shifting a curve when the good’s own price changes. That is a movement along the curve.
• Mixing up the two markets in a chain. In market A the quantity demanded falls; in its complement’s market the demand curve shifts left.
• Giving the new price but not the new quantity.
• Leaving out excess demand or excess supply when explaining why price changes.
• Treating revenue as the area under the curve rather than the price x quantity rectangle.
• Writing about the market in general terms without using the context.

Next steps

Test yourself with the practice questions, then use the revision notes in the last weeks. The free 10-minute diagnostics show where to focus.

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.