Cambridge O Level Economics: Micro vs macro, the market system and the demand curve (2281) – Revision Notes

These revision notes are aligned to the Cambridge O Level Economics 2281 syllabus for examination in 2026 and cover sections 2.1 to 2.3 of topic 2. They are written for the final weeks before the exam. For fuller explanations and longer workings, go to the study guide. To test yourself, try the practice questions.

Other useful pages: the Cambridge O Level Economics hub, the printable checklist, the free diagnostics, and the older outline notes on The Allocation of Resources. All figures below are invented for illustration.

Key definitions

Term	Definition	Syllabus
Microeconomics	The study of the choices of individual households, workers and firms, and of single markets	2.1.1
Macroeconomics	The study of the economy as a whole, including the choices of government that affect the whole economy	2.1.2
Market	Any arrangement that brings buyers and sellers together	2.2.1
Equilibrium	The price where buyers want exactly what sellers offer, so nothing pushes the price up or down	2.2.1
Disequilibrium	Any price where quantity demanded and quantity supplied differ	2.2.1
Price mechanism	The way prices change to answer the three allocation questions	2.2.3
Demand	The quantity buyers are willing and able to buy at each price in a given period	2.3.1
Extension / contraction	A rise / fall in quantity demanded caused by a fall / rise in the good’s own price	2.3.2
Market demand	The total of every buyer’s demand at each price	2.3.3
Increase / decrease in demand	A shift of the whole curve right / left, caused by a change in a condition of demand	2.3.4

Micro versus macro in one table

Question to ask	Micro	Macro
How big is the unit?	One person, firm or market	The whole country’s economy
Who decides?	Consumers, workers, producers	Government (for the whole economy)
Sample topics	A shop’s price, a worker’s job choice, the market for one good	Total output, total employment, the general level of prices

Quick test: if you could describe the matter inside one market, it is micro. If it describes the whole economy, it is macro.

The market system

• Buyers want the most from limited income. Sellers want to earn from selling.
• Scarce resources are allocated through prices.
• High price: buyers want less, sellers offer more. Low price: the reverse.
• Above equilibrium: surplus, so price falls. Below equilibrium: shortage, so price rises.

Method: finding equilibrium from a table

1. Work out quantity demanded minus quantity supplied at each price.
2. The price where the difference is zero is the equilibrium.
3. Above it, supply exceeds demand: surplus. Below it, demand exceeds supply: shortage.
4. Describe the adjustment: surplus, sellers cut price, quantity demanded rises and quantity supplied falls, until they match.

The three key questions and the price mechanism

Question	Price mechanism answer
What to produce	Goods with rising prices and profits attract resources. Goods with falling prices lose them.
How to produce	Firms choose the cheapest method at current resource prices. A higher wage favours machines.
For whom	Those who are willing and able to pay. Income matters.

Chain to learn: demand rises, so price rises, so profit rises, so firms produce more and resources move in.

Demand: the essentials

• The curve slopes downward. Put price up the side and quantity per period along the bottom.
• Own price changes cause movements along the curve. Everything else causes a shift.
• Name the axes and the curve when you draw: D for demand. If it shifts, label the new curve D1.

Worked reminder: aggregation. Two buyers of school notebooks in Town B (illustrative):

Price (cu)	Buyer P	Buyer R	Market demand
2	12	6	18
3	10	5	15
4	8	4	12
5	6	3	9
6	4	2	6

Add across each row, never down a column. At a price of 4 cu: 8 + 4 = 12.

Worked reminder: extension. The price falls from 4 cu to 3 cu. Market quantity demanded rises from 12 to 15. The extension is 3 notebooks. The percentage change in quantity is 3 ÷ 12 × 100 = 25%. The price fell by (3 − 4) ÷ 4 × 100 = −25%.

Conditions of demand: cause and shift

Cause	Direction of change	Shift
Income of buyers (normal good)	Up	Right
Income of buyers (normal good)	Down	Left
Tastes, fashion, advertising	More favourable	Right
Price of a substitute	Up	Right
Price of a complement	Up	Left
Number of buyers	Up	Right
Expected future price	Expected to rise	Right now

Worked reminder: a shift. A new school term raises demand for notebooks by 6 at every price. New market demand: 24, 21, 18, 15, 12 at prices of 2 to 6 cu. At 4 cu, demand rises from 12 to 18, a 50% increase (6 ÷ 12 × 100). This is an increase in demand, not an extension, because the cause is not the price of notebooks.

Method: shift or movement?

1. Identify what changed.
2. If it is the price of this good, it is a movement along the curve: extension or contraction.
3. If it is any other condition, it is a shift: increase or decrease.
4. Write a one-line chain: cause, effect on buyers, direction of the curve.

Preview: equilibrium after a shift

Suppose notebook supply (given) is 6, 9, 12, 15 and 18 at prices of 2, 3, 4, 5 and 6 cu. Before the shift, demand is 18, 15, 12, 9, 6. Demand equals supply at 4 cu, with a quantity of 12. After the shift, demand is 24, 21, 18, 15, 12. Now demand equals supply at 5 cu, with a quantity of 15. A right shift of demand raises both price and quantity. Later topics return to this in depth.

Chains to practise

Write each of these from memory in three lines.

• Surplus: price above equilibrium, so quantity supplied exceeds quantity demanded, so sellers hold unsold stock and cut price, so the quantity demanded rises and the quantity supplied falls, until equilibrium.
• Shortage: price below equilibrium, so quantity demanded exceeds quantity supplied, so some buyers cannot buy and bid the price up, so the quantity demanded falls and the quantity supplied rises, until equilibrium.
• Substitute: the price of tea rises, so some drinkers switch to coffee, so the demand curve for coffee shifts right.
• Complement: the price of printers rises, so fewer printers are bought, so the demand curve for ink shifts left.
• Wage and method: a higher wage makes workers dearer than machines, so a firm switches to capital, and the price mechanism has answered “how”.

Must-know distinctions

Often confused	Difference
Demand and quantity demanded	Demand is the whole curve. Quantity demanded is one point on it.
Extension and increase in demand	An extension is along the curve. An increase is a shift.
Individual and market demand	Market demand is individual demands added horizontally.
Surplus and shortage	Surplus: price above equilibrium. Shortage: price below it.
Want and demand	Demand needs the ability to pay as well as the willingness.

Quick self-test

1. Define microeconomics.
2. A farmer decides which crop to plant next season. Micro or macro?
3. Name the three key questions an economy must answer.
4. At a price of 5 cu, Buyer P wants 6 notebooks and Buyer R wants 3. What is market demand?
5. The price of notebooks falls from 4 cu to 3 cu. Name the change in quantity demanded, its size, and its percentage size.
6. The price of a complement rises. State the effect on the demand curve.
7. At 6 cu, quantity supplied is 18 and quantity demanded is 6. What is the situation and what happens next?
8. Population in Town B rises. Which way does market demand shift?
9. Why is a rise in income not an extension?
10. Using the shift above, by what percentage does demand at 5 cu rise, from 9 to 15?
11. State two things that decide the answer to “for whom” in a market system.

Answers

1. The study of the choices of individual households, workers and firms, and of individual markets.
2. Micro. One decision maker, one market.
3. What to produce, how to produce, and for whom to produce.
4. 6 + 3 = 9 notebooks.
5. An extension of demand; 3 notebooks (12 to 15); 3 ÷ 12 × 100 = 25%.
6. Demand shifts left (a decrease in demand).
7. Surplus of 12 (18 − 6). Sellers cut the price until quantities match at the equilibrium.
8. Right.
9. Income is not the good’s own price, so the whole curve moves.
10. (15 − 9) ÷ 9 × 100 = 66.7%.
11. Willingness to pay and income (the ability to pay).

Where marks are usually lost

• Using “demand” for a price-driven change when the question wants “quantity demanded” or “extension”.
• Giving the definition of demand without “willing and able”.
• Drawing a curve without axis labels, or with the axes the wrong way round.
• Describing disequilibrium as a state without saying what happens next.
• Answering a “how does the price mechanism…” question by listing facts without a chain.
• Treating all government decisions as macro. Scale decides.
• Adding down the columns when aggregating demand.
• Listing a condition of demand without saying which way the curve shifts.
• Not showing working in percentage change questions. Show the figures.

Official syllabus

Cambridge O Level Economics 2281 syllabus for examination in 2026 (version 2), published by Cambridge Assessment International Education, part of Cambridge University Press & Assessment. This page covers sections 2.1 to 2.3.