Cambridge O Level Economics: Causes and effects of price changes, and the market economic system (2281) – Revision Notes

Quick recall for sections 2.6 and 2.9 of the Cambridge O Level Economics syllabus for examination in 2026. For full explanations and longer worked examples use the study guide. When you are ready to test yourself, try the practice questions. Other links: the Cambridge O Level Economics hub, the printable checklist and the free diagnostics. All figures below are invented.

Key definitions

Term	Meaning
Equilibrium price	The price at which the quantity demanded equals the quantity supplied
Shortage	Buyers want more than sellers offer at the going price
Surplus	Sellers offer more than buyers want at the going price
Increase in demand or supply	The curve shifts right: more at every price
Decrease in demand or supply	The curve shifts left: less at every price
Extension or contraction	A move along one curve, triggered by nothing except the product’s own price
Market economic system	Resources are allocated mainly by demand and supply through the price mechanism, with private ownership and a small government role
Price mechanism	Prices that signal, give incentives and ration

2.6.1 Causes of price changes: what shifts which curve

Curve	Shifts right (increase)	Shifts left (decrease)
Demand	Higher incomes for a normal good, rising popularity, price rise of a substitute, price fall of a complement, population growth, expected future price rise	Lower incomes for a normal good, falling popularity, price fall of a substitute, price rise of a complement, expected future price fall
Supply	Lower costs, better technology, subsidy, good weather, more firms	Higher costs, a new tax, bad weather, fewer firms

2.6.2 Method in steps

1. Name the market and decide which curve moves. A cause that changes buyers moves demand; a cause that changes sellers moves supply.
2. Decide the direction: right (increase) or left (decrease).
3. Draw or describe: axes (Price, Quantity), the original curves meeting at P1 and Qty1, the new curve, and the new meeting point at P2 and Qty2.
4. State the effect on price and on quantity, using the four-case table.
5. Explain the adjustment: the shortage or surplus at the old price pushes price towards the new equilibrium, with an extension or contraction along the curve that did not move.
6. Add a consequence (revenue, producers, consumers or resource use).

Change	New price	New quantity
Demand increases	Up	Up
Demand decreases	Down	Down
Supply increases	Down	Up
Supply decreases	Up	Down

If both curves shift, one variable is certain and the other depends on the size of the shifts.

Both shift	Quantity	Price
Demand up, supply up	Up	Depends on which shift is larger
Demand down, supply down	Down	Depends on which shift is larger
Demand up, supply down	Depends	Up
Demand down, supply up	Depends	Down

Worked reminders

A fall in demand. Market for umbrellas (invented): the equilibrium is price 12 and 130 umbrellas, with demand falling by 10, and supply rising by 15, for each dollar rise in price. A dry season cuts demand by 50 at every price. At 12, demand falls to 80 against supply of 130, a surplus of 50. Price falls until demand equals supply at price 10 and 100 umbrellas.

• Price change: (10 − 12) / 12 × 100 = −16.7%
• Sales change: (100 − 130) / 130 × 100 = −23.1%
• Spending falls from 12 × 130 = 1,560 to 10 × 100 = 1,000.

A fall in supply. Same market, with the original demand. A rise in the cost of materials cuts supply by 50 at every price. The new equilibrium is price 14 and 110 umbrellas.

• Price change: (14 − 12) / 12 × 100 = +16.7%
• Sales change: (110 − 130) / 130 × 100 = −15.4%
• Spending falls from 1,560 to 14 × 110 = 1,540.

Percentage change = (new − old) / old × 100. Always divide by the old value. A rise of 25% followed by a fall of 25% does not return you to the start.

Consequences to remember

• Higher price: some buyers drop out, producers earn more per unit, firms expand and new firms enter.
• Lower price: more buyers, less profit per unit, weaker firms leave.
• Prices move resources from products with falling demand to those with rising demand.
• More sales does not always mean more revenue: compare the percentage changes in price and quantity.

2.9 Market economic system

Definition: the choices of what, how and for whom are settled mainly by demand and supply through the price mechanism. Resources are mostly privately owned, firms seek profit, consumers choose, and the government plays a small part.

Advantages	Disadvantages
Wide consumer choice	Public and merit goods may be under-supplied
Competition and profit encourage efficiency and new ideas	Demerit goods and harmful side effects may be over-produced
Fast response to changing demand	Wide gaps in income and wealth
No cost of a central planning body	Powerful firms can limit output and raise prices
Rewards effort and risk-taking	Unemployment and unstable output in a downturn

Examples of different countries: no country is purely a market economy. Even the most market-oriented economies have rules on property and contracts and some state services. An invented Country X charges for nearly all services, Country Y funds health and schools from taxes, and Country Z moved from state price controls to market prices.

Evaluation points: the answer depends on the product (goods with many sellers suit markets), on how well competition works, on how much people can pay, and on the time period. Most economies use a mix.

Worked reminder: two shifts at once

Market for sunhats (invented) starts at price 16 and 140 sold, with demand falling by 10, and supply rising by 10, for each dollar rise in price. If demand rises by 50 and supply by 90 at every price, the new equilibrium is price 14 and 210 sold: quantity rises, price falls because the supply shift is larger. If demand rises by 100 and supply by only 20, the new equilibrium is price 20 and 200 sold: price rises because the demand shift is larger. Always compare the size of the two shifts before stating the price effect.

Evaluation chain for 2.9

Make a point, explain how it works, then qualify it. For example: competition lowers costs (point); firms that charge more than rivals lose customers, so they cut costs to survive (explanation); but this only works where there are many sellers and buyers can compare them (qualification). Finish with a judgement that says what the answer depends on.

Must-know distinctions

• Shift versus movement: a shift needs a change in a condition other than the product’s own price. A movement is caused by the product’s own price changing.
• Increase in demand versus extension of demand: the first is a rightward shift, the second a move down the curve.
• Shortage versus surplus: shortage means demand exceeds supply; surplus means supply exceeds demand.
• Market system versus market failure: the market system is the way of organising the economy; market failure is where it gives a poor result.

Quick self-test

1. A demand curve shifts to the left. Which way does the equilibrium price move?
2. A new tax on sellers shifts which curve, and in which direction?
3. Price rises from 40 to 46. Calculate the percentage change.
4. Name two conditions that could cause an increase in demand for ice cream.
5. At price 8 a market has demand of 140 and supply of 100. State whether there is a shortage or surplus, and its size.
6. Demand and supply both increase. Which of price and quantity is certain to change in a known direction?
7. Give one advantage and one disadvantage of the market economic system.
8. Explain what is meant by the price mechanism acting as a signal.
9. Demand for a good falls by 20% and supply also falls by 20% at every price. What happens to the equilibrium price?
10. Explain why no country is a pure market economy.

Answers

1. Down, with quantity also lower.
2. Supply, to the left, because the tax raises costs. Price rises and quantity falls.
3. (46 − 40) / 40 × 100 = 15%.
4. For example, hotter weather or a rise in incomes (any two valid conditions).
5. Shortage of 140 − 100 = 40.
6. Quantity rises. The price change depends on which shift is bigger.
7. Advantage: wide consumer choice, or competition that lowers costs. Disadvantage: unequal incomes, or under-supply of public goods.
8. A rising price tells firms that consumers want more of the product and that profit is available, so resources move into making it.
9. It stays the same. At the old price both quantities fall in the same proportion, so they still match; only quantity falls (by 20%).
10. Every government sets laws and provides some goods and services, so resources are never allocated by markets alone.

Where marks are usually lost

• Shifting the wrong curve, for example moving supply when incomes change.
• Writing “demand rises because the price falls” and confusing the shift with the extension.
• Not saying what happens to both price and quantity.
• Leaving out axes, curve labels or the two equilibrium points on a diagram.
• Dividing by the new value instead of the old when finding a percentage change.
• Giving a list of advantages without explaining how each one works.
• Evaluating with a bare “it depends” rather than saying what it depends on.
• Using country examples with no link to the question.

Official syllabus

Aligned to the Cambridge O Level Economics 2281 syllabus for examination in 2026, sections 2.6 and 2.9, published by Cambridge International.