Cambridge International AS and A Level Economics: Demand, supply and market equilibrium (9708)

This guide covers sections 2.1 (Demand and supply curves) and 2.4 (The interaction of demand and supply) of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Both sit in topic 2, which is AS Level content. A Level candidates study it too, and the syllabus treats AS content as assumed knowledge for A Level Papers 3 and 4. Price elasticity (2.2 and 2.3) and surplus (2.5) have their own pages. Every market, firm and figure below is invented for illustration. None is a real statistic.

Start from the Cambridge A Level Economics hub or the printable checklist. After this guide, use the revision notes and the practice questions. For the wider topic, see the price system and the microeconomy. Not sure where you stand? Take a free 10-minute diagnostic.

What this guide covers

Section	What you must be able to do
2.1.1	Explain effective demand
2.1.2	Distinguish individual from market demand and supply
2.1.3 and 2.1.4	Explain the determinants of demand and of supply
2.1.5 and 2.1.6	Explain causes of a shift in D and in S
2.1.7	Distinguish a shift from a movement along a curve
2.4.1	Define market equilibrium and disequilibrium
2.4.2	Analyse how shifts change equilibrium price and quantity
2.4.3	Explain joint demand, alternative demand, derived demand and joint supply
2.4.4	Explain price as rationing, signalling and incentivising

The syllabus sets no calculation in these sections. The arithmetic below makes the model concrete, and it is a good way to check your diagrams.

2.1.1 Effective demand

Effective demand is demand backed by the ability to pay: the willingness to buy a good at a given price, together with the purchasing power to do so. A wish is not enough. A student who would like a laptop but has no savings, income or credit adds nothing to market demand. Economists count only effective demand because only buyers who can pay create sales and send signals to producers.

2.1.2 Individual and market demand and supply

Individual demand is the quantity one buyer will purchase at each price. Market demand is the sum of all individual demands at each price. You add quantities at each price, so the curves are added horizontally. Market supply is built the same way from the supply of each firm.

Worked example 1: building market curves

Three buyers (A, B, C) and three suppliers (X, Y, Z) trade in a market for cabbages in an invented town. Price is in currency units (cu) per kilogram and quantity is in thousand kilograms per week.

Price	A	B	C	Market demand	X	Y	Z	Market supply
2	11	9	10	30	2	1	3	6
3	9	7	9	25	4	3	6	13
4	7	5	8	20	6	5	9	20
5	5	3	7	15	8	7	12	27
6	3	1	6	10	10	9	15	34

At a price of 4: demand is 7 + 5 + 8 = 20 and supply is 6 + 5 + 9 = 20. The market curves are straight lines with equations Qd = 40 - 5P and Qs = -8 + 7P. Each is the sum of the individual equations, valid while every quantity is positive.

2.1.3 and 2.1.5 Determinants of demand and shifts in D

If the good’s own price alone changes, you slide along the demand curve. Every other determinant shifts the whole curve. Common determinants:

• Income. For a normal good, higher income shifts D right. For an inferior good, higher income shifts D left because buyers trade up.
• Prices of related goods. A rise in the price of a substitute shifts D right. A rise in the price of a complement shifts D left.
• Tastes and fashion, including advertising and health information.
• Population size and structure.
• Expectations. If buyers expect prices to rise next month, current demand rises.
• Cost and availability of credit, which matters for goods bought on loan.
• Government policy, such as a tax that reduces disposable income.

2.1.4 and 2.1.6 Determinants of supply and shifts in S

If the good’s own price alone changes, you slide along the supply curve. Other determinants shift it:

• Costs of production: wages, raw materials, energy, rent. Higher costs shift S left.
• Technology, which lowers unit cost and shifts S right.
• Taxes and subsidies. An indirect tax raises cost and shifts S left. A subsidy shifts S right.
• Prices of related goods in supply. If wheat becomes more profitable, a farmer switches land from barley, and barley supply shifts left.
• Number of firms, and weather for farm goods.
• Expectations of future price and profit.

2.1.7 Shift or movement?

Use one test. Did the good’s own price cause the change? If yes, it is a movement along the existing curve (an extension or contraction of quantity). If something else changed, the curve shifts. Use precise language: write “shifts right” for a change in demand and “extension” for a change in quantity demanded. A price change is the result of a shift, never its cause.

2.4.1 Equilibrium and disequilibrium

Market equilibrium is the price and quantity where quantity demanded and quantity supplied are equal, so price has no reason to move. Disequilibrium is any other price. In Worked example 1, equilibrium is 4 cu and 20 thousand kg.

Price	Quantity demanded	Quantity supplied	Gap	Result
3	25	13	12	Excess demand (shortage)
4	20	20	0	Equilibrium
5	15	27	12	Excess supply (surplus)
6	10	34	24	Excess supply (surplus)

Chain of reasoning at a price of 3: buyers want 25 but sellers offer 13, so some buyers go without. Sellers see queues and sold-out stock, raise price, and quantity demanded contracts while quantity supplied extends. The process stops when both are equal at 4. At a price of 6 the logic reverses: unsold stock builds up, sellers cut price, and the market moves back towards 4.

On a diagram, the upright axis shows price and the base shows quantity. The downward-sloping D curve and upward-sloping S curve cross at the equilibrium point E (4, 20). Draw a horizontal line at a price of 6: it meets D at 10 and S at 34, and the gap of 24 between those points is the excess supply.

2.4.2 Shifts and the new equilibrium

Always follow three steps: identify which curve shifts, say which way, then read off the new price and quantity.

Worked example 2: four cases in one market

Start from Qd = 40 - 5P and Qs = -8 + 7P, equilibrium at price 4 and quantity 20.

1. Demand rises by 12 at every price (incomes rise). New demand: Qd = 52 - 5P. Set 52 - 5P = -8 + 7P, so 60 = 12P, P = 5, Q = 27. Price and quantity both rise.
2. Supply falls by 12 at every price (input costs rise). New supply: Qs = -20 + 7P. Set 40 - 5P = -20 + 7P, so 60 = 12P, P = 5, Q = 15. Price rises, quantity falls.
3. Both shifts together. Set 52 - 5P = -20 + 7P, so 72 = 12P, P = 6, Q = 22. Price rises for sure. Quantity change depends on the relative size of the shifts.
4. Demand rises by 12 and supply rises by 12. New supply: Qs = 4 + 7P. Set 52 - 5P = 4 + 7P, so 48 = 12P, P = 4, Q = 32. Price is unchanged, quantity rises.

Compare cases 1 and 2. A price rise alone does not tell you which curve moved. Check quantity: if price and quantity move in the same direction, demand probably shifted; if opposite, supply.

2.4.3 Relationships between markets

• Joint demand (complements). Goods used together, such as printers and ink. A rise in the price of printers reduces quantity demanded of printers, so demand for ink shifts left.
• Alternative demand (substitutes). A rise in the price of tea shifts demand for coffee right. The effect is larger when the goods are close substitutes.
• Derived demand. Demand for a factor or input arises from demand for what it makes. If demand for houses falls, demand for bricks and bricklayers falls.
• Joint supply. One production process gives two outputs, such as beef and hides. Higher demand for beef raises cattle slaughtered, so supply of hides shifts right and the price of leather falls.

For evaluation, ask how strong the link is. Substitutes may be poor ones. Derived demand weakens if inputs make up a small share of final cost, or if firms hold stocks. Time matters: farmers need seasons to adjust joint supply.

2.4.4 Functions of price

Price allocates resources in three linked ways.

• Rationing. When supply is limited, price rises until quantity demanded falls to what is available. Scarce goods go to those with the most effective demand.
• Signalling (transmission of preferences). Rising price tells producers consumers want more. Falling price tells them to produce less. Consumers also learn which goods are scarce.
• Incentivising. Higher price raises revenue and profit, so firms supply more and resources move into that market. Lower price encourages buyers to economise.

Worked example 3: a fixed supply of tickets

A hall has 500 seats. Demand is Qd = 1500 - 10P, so the price that sells all seats is 1500 - 10P = 500, giving P = 100 cu. A famous performer is announced and demand rises to Qd = 1800 - 10P. At 100 cu, demand is now 800 against 500 seats, so 300 people miss out. Price rises to 130 cu, where demand is 1800 - 1300 = 500. Rationing: price removes the 300 extra demanders. Signalling: the higher price shows the performer is popular. Incentivising: promoters schedule more shows.

Evaluate the mechanism. Rationing by price favours ability to pay over need, and price signals depend on good information. Firms may not respond quickly, so shortages can last.

Common errors

• Writing “demand rises” when only price fell. That is a movement.
• Drawing a shift in the wrong direction after a cost change. Higher cost shifts S left.
• Treating a surplus or shortage as a permanent state. It describes one price.
• Using “supply” for quantity supplied.
• Stopping at the new equilibrium without saying why price moved there.

Practise next with the practice set.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment, sections 2.1 and 2.4.