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

This guide covers sections 2.6 (price changes) and 2.9 (market economic system) of the Cambridge O Level Economics syllabus for examination in 2026. It teaches why equilibrium prices move, how to show the move on a demand and supply diagram, and how to judge the market economic system. Every business, country and number below is invented for illustration.

Related pages: the Cambridge O Level Economics hub, the printable checklist, the revision notes, the practice questions, the wider Topic 2 guide and the free diagnostics.

What this unit covers

Section	What you must be able to do
2.6.1 Causes of price changes	Show how a change in market conditions alters a product’s price
2.6.2 Consequences of price changes	Use demand and supply diagrams to show the effect of those changes on equilibrium price and sales
2.9.1 Definition	State what the market economic system is
2.9.2 Advantages and disadvantages	Assess the system, with examples of how it works in a variety of countries

You need sections 2.3 to 2.5 first: demand, supply, equilibrium and disequilibrium. If a shortage or surplus is unfamiliar, read the Topic 2 guide before this page.

2.6.1 Causes of price changes

A market price settles where quantity demanded equals quantity supplied. It moves only when the demand curve or the supply curve shifts. A price change on its own never shifts a curve: it moves you along one.

Demand shifts when a condition of demand changes at every price. Typical causes:

• a rise or fall in consumers’ incomes
• a change in tastes, fashion or advertising
• a change in the price of a substitute or a complement
• a change in population or in its age structure
• a change in expectations about future prices

Supply shifts when a condition of supply changes at every price. Typical causes:

• a change in costs, such as wages, raw materials or energy
• new technology that lowers the cost of each unit
• a tax (a cost, so supply falls) or a subsidy (supply rises)
• weather and disease for farm products
• a change in the number of firms in the market

Use the right word. A shift to the right is an increase in demand or supply. A shift to the left is a decrease. A move along a curve is an extension or contraction.

2.6.2 Consequences: reading the diagram

Mark the up-and-down axis “Price” and the left-to-right axis “Quantity”. Draw D and S crossing at the first equilibrium (P1, Qty1). Then draw one new curve and mark the new equilibrium (P2, Qty2). The four single-shift cases are:

Change	Shift	New equilibrium price	New equilibrium sales
Increase in demand	D right	Rises	Rises
Decrease in demand	D left	Falls	Falls
Increase in supply	S right	Falls	Rises
Decrease in supply	S left	Rises	Falls

For an increase in demand, read the diagram in words. S slopes upwards. D1 slopes downwards and crosses S at P1 and Qty1. D2 lies to the right of D1 and crosses S higher up and further right, at P2 and Qty2.

Point	Price	Quantity	Meaning
First equilibrium	P1	Qty1	D1 meets S
At P1 after the shift	P1	Qty1 supplied, more demanded	Shortage
New equilibrium	P2 (higher)	Qty2 (larger)	D2 meets S

At P1 there is now a shortage, so sellers raise price. The rise in price causes an extension of supply along S and a contraction of demand along D2, until the two quantities match again at P2.

Worked example A: a rise in demand

A small town (invented) buys hand-made candles. Price is in dollars, quantity is candles per week.

Price	Demand before	Demand after	Supply
4	120	160	40
5	100	140	60
6	80	120	80
7	60	100	100
8	40	80	120

A craft fair raises demand by 40 candles at every price.

1. Before: demand equals supply at 6 and 80 candles.
2. After: at 6, demand is 120 and supply is 80, a shortage of 40.
3. The shortage lets sellers raise prices. At 7, demand is 100 and supply is 100, so the new equilibrium is price 7 and 100 candles.
4. Price rises by (7 − 6) / 6 × 100 = 16.7%. Sales rise by (100 − 80) / 80 × 100 = 25%.
5. Total spending (price × quantity) rises from 6 × 80 = 480 to 7 × 100 = 700.

Worked example B: a fall in supply

In Country B (invented), a poor harvest cuts the supply of tomatoes by 60 tonnes at every price. Before the harvest: price 12, equilibrium sales 160 tonnes, with demand falling by 20 tonnes, and supply rising by 20 tonnes, for each dollar rise in price. After: supply at 12 is 100 tonnes against demand of 160, a shortage of 60. At 13.5, demand is 130 and supply is 130. The new equilibrium is price 13.5 and 130 tonnes.

• Price rises by 1.5 / 12 × 100 = 12.5%.
• Sales fall by 30 / 160 × 100 = 18.75%.
• Spending falls from 12 × 160 = 1,920 to 13.5 × 130 = 1,755.

The price rise rations the smaller supply: buyers with the least willingness to pay drop out, which is a contraction in demand along the unchanged demand curve.

Worked example C: both curves shift

Often two conditions change at once, and the result for price can go either way. In the market for second-hand bicycles in Town D (invented), the starting equilibrium is price 15 and 150 bicycles. Demand falls by 10, and supply rises by 10, for each dollar rise in price.

Case	Demand change	Supply change	New price	New sales
1	up by 60	up by 20	17 (rises)	190 (rises)
2	up by 20	up by 80	12 (falls)	200 (rises)

Sales rise in both cases because both curves moved right. Price depends on which shift is bigger. When demand rises by more than supply, price rises; when supply rises by more, price falls. If the two shifts are the same size, price stays the same. A decrease in both would give lower sales and an uncertain price.

Why the consequences matter

• Consumers: a higher price means some buyers are priced out; a lower price lets more people buy.
• Producers: a higher price raises profit per unit, which tells firms to produce more and attracts new firms. A lower price pushes some firms out.
• Resource use: prices work as signals. A rising price pulls land, labour and capital towards that product; a falling price releases them. This is how a market reallocates resources without anyone planning it.
• Revenue: do not assume more sales means more revenue. In example B, price rose but sales fell more in percentage terms, so spending fell.

2.9.1 Definition of the market economic system

In a market economic system the three basic economic questions (what, how and for whom) are settled mainly by demand and supply interacting through the price mechanism. Its main features:

• Resources are mostly privately owned by households and firms.
• Consumers decide what to buy; firms decide what to make, aiming for profit.
• Prices are set by buyers and sellers in markets, not by the government.
• Competition between firms pushes them to keep prices and costs down.
• The government’s role is small.

The price mechanism does three jobs. It signals where demand has risen or fallen, it gives an incentive to respond (profit or loss), and it rations scarce goods to those willing and able to pay.

2.9.2 Advantages and disadvantages

Advantages	Disadvantages
Consumers’ spending decides what is produced, so choice is wide	Goods that markets under-supply or fail to supply (public goods, merit goods)
Profit and competition give firms a reason to cut costs and improve quality	Goods with harmful side effects may be over-produced (demerit goods, pollution)
Prices adjust quickly with no need for a planning office	Income and wealth can be very unequal, since spending power decides who gets goods
Rewards effort, risk-taking and new ideas	Firms with market power can restrict output and raise prices
Low cost of government administration	Output and jobs can swing up and down, and some people have no income

How the system works in different countries

No country runs a pure market system. Governments everywhere set laws on property and contracts, and most provide some goods and services. Economies differ in how far they lean on markets. Real economies sit at different points along a range. Three invented countries show it:

• Country X leaves almost all production to private firms and charges for healthcare, schooling and transport. Choice and efficiency are high; people on low incomes may go without.
• Country Y uses markets for most goods but funds schools and health services from taxes. Fewer people miss out, but taxes are higher and the state must manage those services.
• Country Z moved from state-planned prices to market prices. Shops stocked more goods and quality improved, but some households lost jobs as state firms closed.

Evaluating the system

A good judgement depends on the product and the conditions. Markets work well for goods like clothes, food and phones, where many firms compete and buyers know what they want. They work poorly where people cannot pay, where benefits or costs spill onto third parties, or where one firm dominates. In the short run the costs of change (job losses, inequality) can be large; in the long run, growth and innovation may make most people better off. Most economies therefore choose a mix of market and government, which is the focus of 2.11.

Common errors

• Writing “demand increases” when the cause is a price fall. That is an extension.
• Shifting both curves in a single-cause question.
• Forgetting to label both equilibria and the axes.
• Stating a price change without saying what happens to sales.
• Describing a market system as having “no government” or as “the government sets prices”.
• Giving only advantages or only disadvantages when the command word asks you to assess or evaluate.

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. Check the current syllabus on the Cambridge International website.