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

This guide is aligned to the Cambridge O Level Economics 2281 syllabus for examination in 2026 and covers sections 2.1 to 2.3 of topic 2, The allocation of resources: microeconomics and macroeconomics, the role of markets, and demand. The course is not tiered, so everything here applies to every candidate. All the figures in the worked examples are invented for illustration. They describe fictional markets, not real statistics.

Use the Cambridge O Level Economics hub for the full course and the printable checklist to record progress, or check your starting point with the free 10-minute diagnostics. Companion pages for this unit are the revision notes and the practice questions. For the whole of topic 2 in outline, see The Allocation of Resources.

What you must be able to do

Section	What the syllabus asks for
2.1.1, 2.1.2	Say how micro and macro differ, and who makes the decisions in each
2.2.1	Explain how a market system works: buyers, sellers, allocation of scarce resources, equilibrium and disequilibrium
2.2.2	Show that the economic problem creates three key questions: what to produce, how, and for whom
2.2.3	Explain how the price mechanism answers those questions
2.3.1	Define demand; draw and interpret demand diagrams
2.3.2	Use a demand curve to show movements along it (extensions and contractions)
2.3.3	Link individual demand to market demand by aggregation
2.3.4	Explain the causes of shifts in demand (an increase or a decrease in demand)

Paper 1 is 45 minutes of multiple choice and Paper 2 is 2 hours 15 minutes of structured questions. Calculators may be used in both. The multiple-choice questions may include calculations.

2.1 Microeconomics and macroeconomics

Microeconomics studies the choices of individual decision makers and the markets they deal in. Macroeconomics studies the economy as a whole.

	Microeconomics	Macroeconomics
Scale	One household, one firm, one market	The whole economy
Decision makers	Consumers and households, workers, producers (firms)	Governments, acting for the whole economy
Typical question	Why did the price of rice in one market change?	Why is total output in the country growing slowly?

Governments appear on both sides. A government that sets the price of one medicine is making a micro decision. A government that changes taxation to influence total spending is making a macro decision. The test is the scale of the question, not who is asking it.

Worked example (classify). State whether each is micro or macro.

1. A small bakery raises the price of its loaves. Micro: one firm and one market.
2. Country A’s total output rises over a year. Macro: the whole economy.
3. A household chooses to spend less on takeaway meals. Micro: one household.
4. A government changes income tax to affect spending across the whole country. Macro: whole-economy aim.

2.2 The role of markets in allocating resources

2.2.1 How a market system works

A market is any arrangement that brings buyers and sellers together to trade. Buyers want to get the most from limited income. Sellers want to earn as much as they can. Resources are scarce, so every unit sold is one that others could not have.

Prices coordinate the two sides. At a high price, buyers want less and sellers offer more. At a low price, the reverse. Price is the signal that connects them.

Equilibrium is the price at which the quantity buyers want equals the quantity sellers offer. Nothing pushes the price to change. Disequilibrium is any other price, where the two quantities differ.

Worked example (finding equilibrium). The table shows the market for loaves in Town A. It is illustrative. Demand is built later in this guide. Supply is covered in the next section of the syllabus, so here it is simply given.

Price (cu)	Quantity demanded	Quantity supplied	Gap	Situation
1.00	20	2	demand exceeds supply by 18	excess demand (shortage)
1.50	16	6	demand exceeds supply by 10	excess demand
2.00	12	12	0	equilibrium
2.50	8	18	supply exceeds demand by 10	excess supply (surplus)
3.00	4	24	supply exceeds demand by 20	excess supply

The equilibrium price is 2.00 cu and the equilibrium quantity is 12 loaves.

Reasoning chain at 2.50 cu. Sellers offer 18 loaves but buyers only want 8. Ten loaves are unsold. Sellers cut the price to clear stock. As the price falls, buyers want more and sellers offer less. The gap closes. The price keeps falling until it reaches 2.00 cu, where the two quantities match.

At 1.50 cu the chain runs the other way. Buyers want 16 loaves but only 6 are offered. Some buyers cannot get a loaf and will pay more. The price rises, which draws in more supply and discourages some buyers, until it reaches 2.00 cu.

On a diagram, put price up the side and quantity along the bottom. Equilibrium is where the downward-sloping demand curve crosses the upward-sloping supply curve. A price above that point gives a surplus, and a price below it gives a shortage.

2.2.2 The three key questions

Scarcity forces every economy to decide:

• What to produce, because resources used for one good cannot be used for another.
• How to produce it, meaning which resources and methods to combine.
• For whom to produce, meaning who receives the output.

These three questions exist in every economy, whatever its system. Only the way of answering them differs.

2.2.3 How the price mechanism answers them

In a market system, prices and profit answer all three questions.

Question	How prices answer it
What	Higher demand pushes up the price and profit. Firms move resources into that good. Falling demand pushes price and profit down, and resources move out.
How	Firms choose the method with the lowest cost at current resource prices.
For whom	Output goes to those who are willing and able to pay the price. Income decides who can pay.

Worked example (how). A small bakery bakes 500 loaves a day. Method A is labour-intensive: 6 workers and a machine hire fee of 20 cu a day. Method B is capital-intensive: 2 workers and a machine hire fee of 160 cu a day. Compare the cost per loaf.

At a daily wage of 30 cu:

• Method A: 6 × 30 + 20 = 200 cu, so 200 ÷ 500 = 0.40 cu per loaf.
• Method B: 2 × 30 + 160 = 220 cu, so 220 ÷ 500 = 0.44 cu per loaf.

Method A is cheaper. Now wages rise to 50 cu:

• Method A: 6 × 50 + 20 = 320 cu, so 0.64 cu per loaf.
• Method B: 2 × 50 + 160 = 260 cu, so 0.52 cu per loaf.

Method B is now cheaper. The two methods cost the same when 6w + 20 = 2w + 160, so 4w = 140 and w = 35 cu. Above a wage of 35 cu, the bakery switches to machines. The change in a resource price has changed the answer to the question “how”.

Evaluation. The price mechanism answers the questions without anyone planning them, and it responds as prices change. But the answer to “for whom” depends on income. A person with a real need but little income can be left out. Later units look at what governments do about this.

2.3 Demand

2.3.1 Definition and the demand curve

Demand is the quantity of a good or service that consumers are willing and able to buy at each price in a given period of time. Both parts matter. Wanting a bicycle without the money to pay for it is not demand.

The law of demand: when the price of a good rises and other things stay the same, the quantity demanded falls. A demand curve slopes downward. It has price on the vertical axis and quantity per period on the horizontal axis.

Household X’s demand for loaves in Town A (illustrative):

Price (cu)	1.00	1.50	2.00	2.50	3.00
Loaves a week	10	8	6	4	2

Plotted, the points slope down from left to right:

Price (cu)
3.00 |  *
2.50 |    *
2.00 |      *
1.50 |        *
1.00 |          *
     +----------------  Quantity (loaves a week)
        2 4 6 8 10

2.3.2 Movements along the curve

When the good’s own price changes, you slide along the same demand curve. A fall in price gives an extension of demand. A rise in price gives a contraction of demand. The curve does not move.

Worked example. The price of a loaf falls from 2.00 cu to 1.50 cu. Household X buys 6 loaves at 2.00 cu and 8 at 1.50 cu. There is an extension of 2 loaves, a 33.3% rise in quantity demanded, because 2 ÷ 6 × 100 = 33.3. The price fell by 25%, because (1.50 − 2.00) ÷ 2.00 × 100 = −25.

If the price rises from 2.00 cu to 2.50 cu, the quantity falls from 6 to 4. That is a contraction.

2.3.3 Individual and market demand

Individual demand is the demand of one consumer. Market demand is the total of what every buyer in the market wants at each price. This is aggregation: add across, price by price.

Worked example. Three households buy loaves in Town A. Add their quantities at each price.

Price (cu)	Household X	Household Y	Household Z	Market demand
1.00	10	6	4	20
1.50	8	5	3	16
2.00	6	4	2	12
2.50	4	3	1	8
3.00	2	2	0	4

At 2.00 cu, 6 + 4 + 2 = 12. On a diagram, the market curve is the individual curves added sideways (horizontally). It is flatter or further right than any one of them. At 3.00 cu Household Z buys none, so it adds nothing to the total there.

A fourth household entering the market would move the market curve to the right. The number of buyers is a condition of demand.

2.3.4 Conditions of demand and shifts

A change in any influence on demand other than the good’s own price moves the whole curve. The syllabus does not give a list, so learn these typical causes.

Condition	Change	Effect on demand for the good
Income	Rise (for a normal good)	Increase
Tastes, fashion, advertising	Good becomes more popular	Increase
Price of a substitute	Rises	Increase
Price of a complement	Rises	Decrease
Population or number of buyers	Rises	Increase
Expected future price	Expected to rise	Increase now

An increase in demand shifts the curve right: more is bought at every price. A decrease shifts it left.

Worked example. Incomes in Town A rise and demand for loaves increases by 25% at every price. Market quantities at each price become 25, 20, 15, 10 and 5. At 2.00 cu, buyers now want 15 loaves instead of 12, an increase of 3 loaves. The new curve lies to the right of the old one. If instead a health scare cut demand by 25% at every price, quantities would be 15, 12, 9, 6 and 3. That is a decrease, a shift left.

Reasoning chain. Price of tea rises, so some tea drinkers switch to coffee. The demand curve for coffee shifts right. It is a shift, because the cause is not the price of coffee.

Common errors

• Writing “demand falls” when the price of the good rises. Say the quantity demanded contracts.
• Moving the curve for a price change, or moving along it for a change in income.
• Leaving out “willing and able”.
• Drawing price on the horizontal axis, or leaving the axes unlabelled.
• Adding prices instead of quantities when aggregating.
• Saying equilibrium means everyone is satisfied. It means the quantities match.
• Explaining the price mechanism without a chain: give signal, response and result.

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.