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

This guide covers 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. The specification labels no content as AS or A level. How demand and supply combine to give equilibrium is a separate topic, so it is left out. Course pages: the OCR Economics hub and the checklist. Practise with the revision notes and the practice questions, and find weak spots with the free diagnostics. Every country, firm and figure below is invented for illustration.

What you must be able to do

Area	You must be able to
Markets and demand	Explain markets, sub-markets, individual and market demand, and the four types of demand
Why demand slopes down	Use marginal utility and income and substitution effects
Demand curve	Show movement versus shift, and explain the shifters
Consumer surplus	Draw, calculate and evaluate
Supply	Link individual and market supply; explain the three types; show movement versus shift and the shifters
Producer surplus	Draw, calculate and evaluate

Markets and sub-markets

A market is wherever buyers and sellers make contact so that trade can happen. It need not be a place: online trading counts. A sub-market is a distinct part of a wider market with its own buyers, sellers and price. The housing market contains sub-markets for flats, family houses and rented homes; the labour market contains one for nurses and another for electricians. Prices can move differently in each.

Individual and market demand

Demand is the set of quantities consumers want and can afford at each price over a set period, other things equal. A wish without the money to pay is not demand. Market demand adds every buyer’s quantity at each price. On a diagram you add the curves horizontally, so you add quantities, not prices.

Worked example (Country A, illustrative): three households buy cinema tickets each month.

Price (£)	Household X	Household Y	Household Z	Market demand
4	14	9	6	29
6	11	7	4	22
8	8	5	2	15
10	5	3	1	9
12	2	1	0	3

At £4: 14 + 9 + 6 = 29. Household Z stops buying at £12, but the market still demands 3. A new household in the area shifts market demand right.

Types of demand

• Derived demand: demand for a good because it is needed to make something else. Demand for steel comes from demand for cars and bridges. Labour demand is derived from demand for the output. A fall in demand for the final product cuts demand for the inputs.
• Joint demand: complements demanded together, such as printers and ink cartridges. A rise in the price of one reduces the quantity demanded of that good and decreases demand for the other.
• Composite demand: demand for a good with several uses, which is the sum of the demands for each use. Illustration: at £0.80 a litre, milk sells 60 (million litres) for drinking, 30 for cheese and 10 for yoghurt, so composite demand is 100. If cheese demand rises by 20 at that price, composite demand becomes 120 and less milk is left for the other uses.
• Competitive demand: substitutes that compete for the same spending, such as tea and coffee. A rise in the price of one raises demand for the other.

Why demand slopes downwards

Marginal utility

Utility is satisfaction. Marginal utility is the satisfaction added by consuming one more unit. For most goods it diminishes as you consume more. A consumer pays only up to the value of the last unit’s extra satisfaction, so a lower price is needed to sell more.

Worked example: one consumer’s marginal utility from cups of tea, measured in money (£), is 3.00, 2.40, 1.80, 1.20 and 0.60 for cups one to five.

• At £1.50 she buys cups one to three, because the third (1.80) is worth more than the price and the fourth (1.20) is not. She buys 3 cups.
• At £1.00 the fourth cup (1.20) is now worth buying. She buys 4 cups.

Across goods, utility is maximised when marginal utility per pound is equal. If good A has marginal utility 12 utils at £2 (12 ÷ 2 = 6 per pound) and good B has 15 utils at £3 (15 ÷ 3 = 5 per pound), she gains by buying more A and less B. A fall in the price of a good raises its marginal utility per pound, so she buys more of it.

Income and substitution effects

A fall in price has two effects.

• Substitution effect: the good is now cheaper relative to others, so consumers switch towards it.
• Income effect: the fall raises real income, meaning purchasing power. Take money income of £400 and a price cut from £4 to £3.20: she can now afford 400 ÷ 3.20 = 125 units instead of 400 ÷ 4 = 100, a 25 per cent rise in what her income can buy. For a normal good she uses some of this extra power to buy more.

Both effects raise quantity demanded of a normal good. For an inferior good the income effect works the other way.

Movement along versus shift of demand

Only the good’s own price moves you along the curve: an extension when price falls, a contraction when it rises. Any other factor changes demand at every price and shifts the curve: an increase shifts it right, a decrease left.

Worked example (good M, illustrative; quantity in thousands, price in £). Demand is P = 20 − 4Q. At £8, Q = 3. If price falls to £4, Q = 4: an extension, because only price changed. If incomes rise and demand becomes P = 24 − 4Q, then at £8, Q = (24 − 8) ÷ 4 = 4. That is an increase in demand, a shift right, of 1 thousand at every price.

Factors that shift demand:

Factor	Effect
Income	Rise increases demand for normal goods, decreases it for inferior goods
Price of substitutes	Rise in a substitute’s price increases demand
Price of complements	Rise in a complement’s price decreases demand
Tastes, fashion, advertising	Favourable change increases demand
Population and its age structure	Growth or a change in make-up shifts demand
Expectations	Expecting higher prices later increases demand now
Interest rates and credit	Cheaper borrowing increases demand for costly goods
Government action	Bans, regulations or information campaigns change demand

In a diagram answer, label both axes, name each curve and mark the original and new quantity.

Consumer surplus

Consumer surplus is the gain buyers get from paying less than the most they were prepared to pay. In a diagram, look for the region under the demand curve and over the price line, out to the quantity bought. It is a triangle when demand is a straight line.

For good M at £8, quantity is 3 and the triangle has height 20 − 8 = 12:

consumer surplus = ½ × 3 × 12 = £18 (thousand).

A fall in price from £8 to £4. Quantity becomes 4 and the triangle’s height is 20 − 4 = 16, so surplus = ½ × 4 × 16 = 32. The rise is 14, in two parts:

• Existing buyers pay £4 less on 3 units: a rectangle of 3 × 4 = 12.
• New buyers gain a small triangle: ½ × 1 × 4 = 2.

Check: 12 + 2 = 14. A price rise from £4 to £8 reverses this: surplus falls by 14, or 14 ÷ 32 = 43.75 per cent.

Evaluation.

• The gain depends on the size of the price change and the slope of the demand curve.
• The curve is a model. Real willingness to pay is hard to measure, and measuring it in money treats a pound as worth the same to the rich and the poor.
• The cause of the price change matters. If demand increases and price rises, surplus can still rise. Using P = 24 − 4Q, a price of £10 gives Q = 3.5 and surplus = ½ × 3.5 × 14 = 24.5, above the original 18.
• A lower price is not always good: if the good harms others, cheaper consumption can reduce wider welfare, and a cut in quality means consumers gain less than the figure suggests.
• Firms that charge different prices to different buyers can capture some surplus.

Individual and market supply

Supply is the set of quantities producers choose to offer at each price over a set period, other things equal. Market supply is the horizontal sum of all firms’ supplies. If three firms supply 40, 25 and 15 units at £10, market supply at £10 is 80.

Supply slopes upwards because a higher price covers the higher marginal cost of extra output and draws more firms into the market.

Types of supply

• Joint supply: one process yields two or more products, such as beef and hides. If beef prices rise, more cattle are reared and the supply of hides increases, which pushes hide prices down.
• Composite supply: a good supplied for more than one use or market, such as oil going to fuel and plastics. Total supply is the sum across uses, and a rise in supply to one use reduces what is left for another.
• Competitive supply: producers can switch resources between alternatives, so more of one product means less of the other. A farmer with 100 hectares earns £480 a hectare from wheat and £450 from barley. If the wheat margin rises to £520 she moves land to wheat and the supply of barley falls.

Movement along versus shift of supply

If the good’s own price is the only thing that moves, you slide along one curve: an extension when price rises, a contraction when it falls. Other factors shift supply: an increase shifts it right (more at every price), a decrease left.

Worked example (good N, illustrative). Supply is P = 2 + 2Q (Q in thousands). At £8, Q = 3. A fall in unit costs of £1 gives P = 1 + 2Q, so at £8, Q = 3.5: an increase in supply.

Factor	Effect
Costs of production (wages, raw materials, energy)	Rise decreases supply
Technology	Better technology increases it
Indirect taxes	Rise decreases supply
Subsidies	Increase supply
Prices of other goods	Higher price of an alternative product decreases supply of this one
Number of firms	More firms increase supply
Weather and natural events	Poor harvests decrease supply
Expectations	Expecting higher prices later can reduce supply now

Producer surplus

Producer surplus is the gain sellers get from receiving more than the least they would have accepted. On a diagram it is the area above the supply curve and under the price line, out to the quantity sold.

For good N at £8, Q = 3 and the triangle’s height is 8 − 2 = 6:

producer surplus = ½ × 3 × 6 = £9 (thousand).

A rise in price from £8 to £10. Q = 4 and the height is 8, so surplus = ½ × 4 × 8 = 16. The gain is 16 − 9 = 7:

• Rectangle on existing units: 3 × 2 = 6.
• Triangle on new units: ½ × 1 × 2 = 1.

Evaluation.

• Producer surplus is not profit. It covers returns above the cost of the marginal unit, but fixed costs still need paying out of it.
• A price rise helps most if it comes from higher demand. One caused by higher costs shifts the curve up and may not raise surplus.
• A lower price from a cost-saving technology can lower surplus per unit while raising volume, so the net effect needs working out.
• The curves are only models and cannot be read exactly in practice.

Common errors

• Writing “demand has fallen” for a price rise. That is a contraction; only a non-price factor shifts the curve.
• Adding prices rather than quantities to build market demand.
• Using the wrong triangle height: it is the gap between the price and the curve’s intercept.
• Forgetting the rectangle when price changes.
• Giving “income” as a shifter without saying whether the good is normal or inferior.
• Defining composite demand as demand for complements.

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).