OCR A Level Economics: Demand, supply and consumer and producer surplus (H460) – Revision Notes

These notes condense the first part of the topic Supply and demand and the interaction of markets in Component 1 (Microeconomics) of OCR’s A Level Economics specification (H460), Version 3.0 of June 2026, first assessed in 2021. For full explanations go to the study guide, then test yourself with the practice questions. Course pages: the OCR Economics hub, the checklist and the free diagnostics. All figures are invented.

Key definitions

Term	Meaning
Market	Wherever buyers and sellers make contact to trade
Sub-market	A distinct part of a market with its own buyers, sellers and price
Demand	Quantities consumers want and can afford at each price, other things equal
Market demand	All buyers’ quantities totalled, price by price
Supply	Quantities producers choose to offer at each price, other things equal
Market supply	Sum of individual firms’ supplies at each price
Consumer surplus	Gap between the most buyers would pay and the price paid; area beneath the demand curve, above the price
Producer surplus	Gap between the price received and the least sellers would accept; area above the supply curve, under the price

Types of demand and supply

Type	Meaning	Example
Derived demand	Wanted for what it helps make	Bricks from demand for houses
Joint demand	Complements bought together	Cameras and memory cards
Composite demand	One good, several uses; add the uses	Milk for drinking, cheese, yoghurt
Competitive demand	Substitutes	Bus and train travel
Joint supply	One process, two products	Beef and hides
Composite supply	One good supplied to several uses	Oil to fuel and plastics
Competitive supply	Resources switch between products	Land for wheat or barley

Joint demand and joint supply are not the same thing. The first is about buyers, the second about producers. Composite demand sums uses; it does not mean complements.

Why demand slopes downwards

Marginal utility. Extra satisfaction falls with each extra unit. Consumers buy while marginal utility is at least the price, so a lower price means more units. Across goods, spending is best when marginal utility per pound is equal. If it is higher for one good, buy more of that one.

Income and substitution effects. A price fall has two effects.

1. Substitution: the good is cheaper relative to others, so switch towards it.
2. Income: real income rises, so more can be bought. For a normal good this adds to the extra quantity.

Movement or shift?

	Movement along	Shift of the curve
Cause	Change in the good’s own price	Any other factor
Demand names	Extension (price down), contraction (price up)	Increase (right), decrease (left)
Supply names	Extension (price up), contraction (price down)	Increase (right), decrease (left)

Shifters of demand: income (normal or inferior), prices of substitutes and complements, tastes and advertising, population, expectations, credit and interest rates, weather, government action.

Shifters of supply: costs of production, technology, indirect taxes, subsidies, prices of other goods, number of firms, weather and natural events, expectations, regulation.

Method for a shift question:

1. Name the factor and the curve it moves.
2. Say right or left, and increase or decrease.
3. Draw it: label axes, original and new curves, and the change in quantity at a given price.

Worked reminder (illustrative). Demand is Q = 60 − 4P. At £5, Q = 60 − 20 = 40. A rise in incomes makes demand Q = 72 − 4P, so at £5, Q = 52. That is an increase in demand of 12 at every price, a shift right. If instead price had fallen to £4 on the original curve, Q = 44: an extension.

Chain for a written answer: a factor changes, so the amount wanted (or offered) differs at each price, so the curve moves, so the quantity at a given price changes. Keep each link explicit.

Consumer surplus: method

Picture the axes: price is the vertical scale, quantity the horizontal one. The demand curve falls from its intercept on the price axis. A horizontal line at the price meets it at the quantity bought. Consumer surplus is the triangle above that line and below the curve, back to the vertical axis.

Straight-line demand P = a − bQ, price p.

1. Find quantity bought: Q = (a − p) ÷ b.
2. Surplus = ½ × Q × (a − p).
3. For a price change, find the change in surplus, or split it into a rectangle (old quantity × price fall) and a triangle (extra quantity × price fall × ½).

Worked reminder (illustrative). Demand is P = 30 − 5Q, Q in hundreds.

Price (£)	Quantity	Surplus working	Surplus
15	3	½ × 3 × 15	22.5
10	4	½ × 4 × 20	40.0

The rise is 17.5 (a 77.8 per cent increase). Check: rectangle 3 × 5 = 15 plus triangle ½ × 1 × 5 = 2.5 gives 17.5.

Evaluating a change in consumer surplus:

• The size depends on the price change and the slope of the demand curve.
• Demand curves are estimates, and money values treat every pound alike across rich and poor.
• Check why price moved: a rise caused by higher demand can still raise surplus.
• Cheaper harmful goods may cut wider welfare.
• Sellers who charge different prices to different buyers keep some surplus.
• A lower price from lower quality gives a smaller real gain.

Producer surplus: method

Straight-line supply P = c + dQ, price p.

1. Find quantity supplied: Q = (p − c) ÷ d.
2. Surplus = ½ × Q × (p − c).
3. For a price change, rectangle (the lower of the two quantities × price change) plus triangle (½ × extra quantity × price change).

Worked reminder (illustrative). Supply is P = 4 + 3Q, Q in hundreds.

Price (£)	Quantity	Surplus working	Surplus
13	3	½ × 3 × 9	13.5
10	2	½ × 2 × 6	6.0

A fall of £3 cuts surplus by 7.5. Check: rectangle 2 × 3 = 6 plus triangle ½ × 1 × 3 = 1.5 gives 7.5.

Evaluating a change in producer surplus:

• Surplus is not profit, because fixed costs still have to be paid.
• Price rises from higher demand help more than rises from higher costs.
• A cost-saving technology may lower the price and the surplus per unit while volume rises, so work out the net effect.
• The curves are models and cannot be read exactly in real markets.

Must-know distinctions

• Contraction (price rises) is not a decrease in demand (a leftward shift).
• Movement is caused by own price; a shift is caused by everything else.
• Adding market demand: add quantities across, not prices.
• Surplus rectangle: existing units gain. Surplus triangle: new units gain.
• Derived demand is about inputs; composite demand is about uses.

Quick self-test

1. Three firms supply 12, 18 and 25 units at £5. What is market supply at £5?
2. Demand for tyres depends on demand for cars. Name this type of demand.
3. Good A gives 20 utils at £4. Good B gives 18 utils at £3. Which should the consumer buy more of?
4. Demand is P = 40 − 8Q. Calculate consumer surplus at a price of £24.
5. Price falls to £16. Calculate the new consumer surplus and the change.
6. Split that change into a rectangle and a triangle.
7. Supply is P = 3 + 2Q. Calculate producer surplus at a price of £11.
8. Price falls to £9. Calculate the new producer surplus and the fall, split into rectangle and triangle.
9. A tax on producers is raised. Is this a movement or a shift of supply, and in which direction?
10. Give one example of joint supply and one of competitive supply.

Answers

1. 12 + 18 + 25 = 55 units.
2. Derived demand.
3. B has 18 ÷ 3 = 6 utils per pound and A has 20 ÷ 4 = 5, so buy more of B.
4. Q = (40 − 24) ÷ 8 = 2; surplus = ½ × 2 × 16 = £16.
5. Q = (40 − 16) ÷ 8 = 3; surplus = ½ × 3 × 24 = 36; change = 36 − 16 = £20 rise.
6. Rectangle 2 × 8 = 16; triangle ½ × 1 × 8 = 4; total 20.
7. Q = (11 − 3) ÷ 2 = 4; surplus = ½ × 4 × 8 = £16.
8. Q = (9 − 3) ÷ 2 = 3; surplus = ½ × 3 × 6 = 9; fall = £7, made of rectangle 3 × 2 = 6 and triangle ½ × 1 × 2 = 1.
9. A shift left (a decrease in supply), because tax is not the good’s own price.
10. Joint: beef and hides. Competitive: a farmer’s land used for wheat or barley (other valid examples gain credit).

Where marks are usually lost

• Confusing a contraction with a decrease in demand, or an extension with an increase.
• Drawing a shift without labelling the axes, both curves and the new quantity.
• Adding prices instead of quantities when building market demand.
• Using the wrong height for the surplus triangle.
• Leaving out the rectangle when surplus changes with price.
• Listing shifters without saying which curve moves and in which direction.
• Describing consumer surplus in words only, with no reference to the area on the diagram.
• Stopping at “surplus rises” in an evaluation question, without weighing who gains, why price moved and what the model leaves out.

Official syllabus

OCR’s A Level Economics specification (H460), published by OCR, Version 3.0 (June 2026), for first assessment in 2021. Sections used: the first part of the Supply and demand and the interaction of markets topic, in Component 1 (Microeconomics).