Cambridge O Level Economics: Supply, and equilibrium and disequilibrium prices (2281) – Revision Notes

These notes condense sections 2.4 (Supply) and 2.5 (Price determination) of the Cambridge O Level Economics 2281 syllabus for examination in 2026. The course is not tiered. For full explanations and longer worked examples, read the study guide, then test yourself with the practice questions. The Cambridge O Level Economics hub, the printable checklist and the free diagnostics show where this unit sits. All figures below are invented.

Definitions to know word for word

Term	Meaning
Supply (2.4.1)	The amount of a good or service that producers are prepared and able to offer at each possible price during a stated period
Supply schedule	A table of prices and quantities supplied
Supply curve	A graph of the schedule: price on the vertical axis, quantity on the horizontal, sloping upward
Extension of supply	Quantity supplied rises because the price of the good rises (movement up the curve)
Contraction of supply	Quantity supplied falls because the price of the good falls (movement down the curve)
Market supply (2.4.3)	The sum of all sellers’ supply at each price
Increase in supply	Rightward shift: more offered at every price
Decrease in supply	Leftward shift: less offered at every price
Equilibrium (2.5.1)	Quantity demanded equals quantity supplied; there is no pressure for price to change
Disequilibrium (2.5.2)	Price differs from equilibrium, so Qd and Qs differ
Shortage	Demand exceeds supply (price below equilibrium)
Surplus	Supply exceeds demand (price above equilibrium)

Movement or shift? One test

Ask: what changed?

• The price of this good changed: movement along the curve (extension or contraction).
• Anything else about production changed: the curve shifts (increase or decrease).

Event	Result
Price of candles rises	Extension of supply
Price of candles falls	Contraction of supply
Wax gets cheaper	Increase in supply
Wick-making machine improves output per worker	Increase in supply
Per-unit tax on sellers rises	Decrease in supply
Subsidy to producers	Increase in supply
More stalls open	Increase in supply
Fire destroys stock of materials	Decrease in supply

Aggregation in steps

1. Pick a price.
2. Read each seller’s quantity at that price.
3. Add the quantities. Do not add the prices.
4. Repeat for every price. The totals are the market schedule.

Worked reminder. A village market for handmade candles has two stalls, A and B. Price is in currency units (cu) and quantity is candles per day.

Price (cu)	2	4	6	8	10
Stall A	5	15	30	45	60
Stall B	15	25	30	35	40
Market supply	20	40	60	80	100

At a price of 6 cu: 30 + 30 = 60. If the number of stalls changes, the whole market curve shifts. If one stall’s costs change, only its own curve and then the market total move.

Finding equilibrium in steps

1. Write the demand and supply schedules side by side for the same prices.
2. Work out Qd - Qs at each price.
3. Equilibrium is where the gap is zero. State the price and the quantity with units.
4. On a diagram, it is where D and S cross. Mark both values on the axes.
5. If you have equations, set Qd = Qs and solve for P, then substitute to find Q.

Worked reminder (candles). Demand is 100, 80, 60, 40 and 20 candles at 2, 4, 6, 8 and 10 cu.

Price	Qd	Qs	Qd - Qs	Position
2	100	20	80	Shortage
4	80	40	40	Shortage
6	60	60	0	Equilibrium
8	40	80	-40	Surplus
10	20	100	-80	Surplus

Equilibrium price is 6 cu and equilibrium sales are 60 candles per day. With equations, Qd = 120 - 10P and Qs = 10P, so 120 = 20P, P = 6 and Q = 60. Total spending on candles at equilibrium is 6 x 60 = 360 cu.

Disequilibrium in steps

1. Compare the market price with equilibrium.
2. Price below equilibrium: shortage. Size = Qd - Qs. At 4 cu, 80 - 40 = 40 candles.
3. Price above equilibrium: surplus. Size = Qs - Qd. At 8 cu, 80 - 40 = 40 candles.
4. Say what happens next in a free market.

Chain of reasoning for a surplus: price above equilibrium, so stalls hold unsold candles, so they cut prices, so buyers take more and sellers offer less, and the market moves down to 6 cu, where the gap is zero.

Chain of reasoning for a shortage: price below equilibrium, so buyers cannot get what they want and bid up the price (or sellers raise it), so quantity supplied extends and quantity demanded contracts, and the market moves up to 6 cu.

Quantity traded in disequilibrium is the smaller of Qd and Qs. At 4 cu only 40 candles can be sold, because that is all that is on offer.

Shifting supply and the new equilibrium

A new stall opens and offers 10 more candles at every price. Supply rises to 30, 50, 70, 90 and 110. The new supply equation is Qs = 10P + 10. Setting 120 - 10P = 10P + 10 gives P = 5.5 and Q = 65.

In words: the supply curve shifts right, the old equilibrium of 6 cu now has a surplus of 70 - 60 = 10, so price falls to 5.5 cu and sales rise from 60 to 65.

Pattern to remember, with demand unchanged:

Supply change	Equilibrium price	Equilibrium quantity
Increase	Falls	Rises
Decrease	Rises	Falls

Worked reminder for a decrease. Wax becomes dearer and every stall offers 20 fewer candles at each price. Supply becomes Qs = 10P - 20. Setting 120 - 10P = 10P - 20 gives 140 = 20P, so P = 7 and Q = 50. At the old price of 6 cu, supply is 40 against demand of 60, a shortage of 20, so the price rises to 7 cu and sales fall from 60 to 50.

Drawing the diagram

Price
  |  \               / S
  |    \           /
  |      \       /
  |        \   /
  |          X            X = equilibrium
  |        /     |      /       \  D
  +----------------------- Quantity per day

Checklist for every diagram: axes labelled Price and Quantity; each curve labelled; equilibrium marked with dotted lines to both axes and the values written; a new curve labelled S1 with an arrow showing the direction of the shift; the new equilibrium marked and its values written.

Must-know distinctions

• Extension vs increase: extension is a movement caused by price; increase is a shift caused by something else.
• Shortage vs scarcity: scarcity is the basic economic problem and always exists. A shortage is a market condition that exists only when price is below equilibrium.
• Individual vs market supply: market supply is the horizontal sum of individual supplies.
• Equilibrium vs fairness: equilibrium means the market clears. It says nothing about whether the outcome is fair.

Quick self-test

1. Define supply.
2. A market has 40 farms, each supplying 15 crates at a given price. How many crates does the market supply, and what is the total if 5 more identical farms join?
3. State whether each is a movement or a shift: (a) price of the good falls; (b) fuel costs fall.
4. Quantity supplied rises from 20 to 30 when price rises. What is the percentage change?
5. Qd = 200 - 4P and Qs = 6P - 40. Find the equilibrium price and quantity.
6. Using question 5, find the size and type of the gap at a price of 20.
7. Name two conditions that would increase supply.
8. A price is above equilibrium. State what exists and what happens next.
9. Why does a supply curve slope upward? Give one reason.
10. Supply decreases and demand stays the same. Say what happens to price and quantity.

Answers

1. The amount of a good or service that producers are prepared and able to offer at each possible price during a stated period.
2. 40 x 15 = 600 crates. With 45 farms the total is 45 x 15 = 675 crates, up by 75 (12.5%).
3. (a) Movement: a contraction of supply. (b) Shift: an increase in supply.
4. (30 - 20) / 20 x 100 = 50%.
5. 200 - 4P = 6P - 40 gives 240 = 10P, so P = 24. Q = 200 - 96 = 104.
6. At 20: Qd = 200 - 80 = 120 and Qs = 120 - 40 = 80. Shortage of 40, because Qd exceeds Qs.
7. Any two from: lower costs, better technology, a subsidy, more sellers, good weather.
8. A surplus exists. Sellers cut price, so buyers take more and sellers offer less until the market clears.
9. A higher price makes extra output more profitable and covers the higher cost of each extra unit.
10. Price rises and quantity falls.

Where marks are usually lost

• Using “increase” or “decrease” for a price-driven change. Use extension and contraction.
• Leaving out the units or the word “per” from price and quantity answers.
• Stating the equilibrium price but not the quantity, when the question asks for sales.
• Mixing up which side is bigger: price below equilibrium gives Qd above Qs.
• Drawing the new curve without labelling it S1 (or S2) and the old one S, so the shift cannot be followed.
• Stopping at “price changes” without saying why, in terms of unsold stock or competing buyers.
• Adding prices when asked for market supply.
• Treating a shift of supply as a shift of demand when the cause is a cost or tax.

Official syllabus

This page follows the Cambridge O Level Economics 2281 syllabus for examination in 2026 (version 2), published by Cambridge Assessment International Education. It covers sections 2.4 and 2.5.