OCR A Level Economics: Equilibrium, volatility and the supply and demand model (H460) – Revision Notes

These notes condense the second half of the OCR A Level Economics (H460) topic “Supply and demand and the interaction of markets”, from the specification Version 3.0 (June 2026), first assessment 2021. The study guide has the full explanations and longer worked examples. To test yourself, use the practice questions, the free diagnostics, the course hub and the checklist. Figures are invented.

Key definitions

Term	Meaning
Equilibrium	Buyers and sellers want to trade the same quantity at the going price, so nothing pushes the price to change
Disequilibrium	Quantity demanded differs from quantity supplied at the current price
Surplus (excess supply)	Quantity supplied above quantity demanded, so the price tends to fall
Shortage (excess demand)	Quantity demanded above quantity supplied, so the price tends to rise
Derived demand	Demand for a good or factor because of demand for what it helps to make
Joint supply	One production process yields two or more products
Competitive supply	Producers can switch inputs between products, so the goods compete for resources
Composite demand	One good is wanted for several uses
Volatility	Large and frequent changes in price or output
Comparative statics	Comparing two equilibria before and after a change

Equilibrium in three markets

Market	Price is	Buyers	Sellers
Product	Price of the good	Consumers	Firms
Financial	Interest rate, exchange rate or bond price	Borrowers, investors	Savers, lenders
Factor	Wage, rent or return on capital	Firms (derived demand)	Owners of the factor

Method in steps (algebra).

1. Set Qd = Qs.
2. Solve for P.
3. Substitute P into both equations to find Q.
4. Check that both equations give the same Q.

Worked reminder. Qd = 540 − 15P and Qs = −60 + 25P.

540 − 15P = −60 + 25P  →  600 = 40P  →  P = 15
Q = 540 − 15(15) = 315   (check: −60 + 375 = 315)
At P = 12: Qd = 360, Qs = 240, shortage of 120
At P = 18: Qd = 270, Qs = 390, surplus of 120

Factor market reminder. Ld = 600 − 20w and Ls = −100 + 30w. Then 700 = 50w, so w = £14 and L = 320. If product demand falls and labour demand becomes Ld = 550 − 20w, then 650 = 50w, so w = £13 and L = 290. The wage falls 7.14% and employment 9.38%. Labour demand is derived, so the shift in the product market is the cause.

Financial market reminder. The price of borrowing is the interest rate. More saving shifts loanable funds supply right, which lowers the rate and raises the amount lent. A fall in confidence among borrowers does the opposite to demand.

Bond prices and yields. Yield = fixed payment ÷ price. A bond paying £30 a year has a yield of 30/600 = 5.0% at a price of £600 and 30/400 = 7.5% at £400.

Shifts and the new equilibrium

Method in steps (diagram).

1. Draw the original curves and label the equilibrium P0 and Q0.
2. Name the factor and the curve it shifts.
3. Draw the new curve and label P1 and Q1.
4. State the direction of price and quantity, and compare with the original.

Shift	Effect on price	Effect on quantity
Demand increases	Rises	Rises
Demand decreases	Falls	Falls
Supply increases	Falls	Rises
Supply decreases	Rises	Falls

Worked reminders. Using the same market as above:

• demand rises by 40 at each price (Qd = 580 − 15P): 640 = 40P, so P = 16 and Q = 340;
• supply rises by 80 at each price (Qs = 20 + 25P): 520 = 40P, so P = 13 and Q = 345.

The supply increase cuts price by 13.33% and raises quantity by 9.52%. The demand increase lifts price by 6.67% and quantity by 7.94%.

Both curves shift. Only one of the two results is guaranteed. The other turns on the relative sizes of the shifts, and your answer should say so.

Related markets

• Substitutes: a price rise in one shifts demand for the other right.
• Complements: a price rise in one shifts demand for the other left.
• Joint supply: more of one product also means more of the other. If demand for beef rises, hide supply rises and the hide price falls.
• Competitive supply: a higher price for one product pulls resources away from the other, so its supply shifts left.
• Derived demand: a fall in house building cuts demand for bricks and for builders.

Evaluate by asking how close the goods are, how big and lasting the original change is, how quickly the second market can respond, and whether other factors are moving too.

Disequilibrium

Causes	Consequences of a surplus	Consequences of a shortage
Sudden shifts of demand or supply	Unsold stock	Queues and waiting lists
Sticky prices (contracts, posted prices)	Falling prices	Resale at high prices
Price set above or below equilibrium	Output cuts, waste of perishables	Rationing by luck or connections

Price signals restore balance in a free market, but only after a time lag.

Volatility

Price and output are most volatile when:

• demand and supply are both inelastic;
• supply is fixed in the short run, for example by a harvest;
• there are frequent supply or demand shocks;
• supply responds with a lag;
• speculation amplifies moves.

Worked reminder. Qd = 42 − P with a fixed supply.

Supply	Price	Change in output	Change in price
30	12	-	-
24	18	−20%	+50%
36	6	+20%	−50%

A 20% change in output produces a 50% change in price. Steeper curves magnify shocks.

Cobweb: producers decide this period’s output on last period’s price. Prices then swing above and below equilibrium. The swings shrink if supply responds less strongly than demand, and grow if it responds more strongly.

Evaluating the model

Market	Model works well because	Model works less well because
Commodities	Standard goods, many traders	Speculation, stocks, producer groups
Housing	Explains price pressure from demand	Differences between homes, credit, planning, expectations
Transport	Explains peak pricing	Subsidy, regulated fares, congestion

Assumptions: rational behaviour, homogeneous goods, many buyers and sellers, full information, flexible prices, ceteris paribus, no externalities.

Techniques: diagrams, schedules, algebra, percentage changes, comparative statics.

Judgement. Name the market. Say which assumption fails most. State whether the model still gives a useful direction of change.

Transport reminder. A train has 200 seats and demand is Qd = 400 − 20P. The fare that fills it exactly is £10. At a fixed £6, demand is 280, so 80 passengers are turned away or stand. Fixed prices and fixed capacity together produce disequilibrium.

Evaluation chain (one example). Claim: the model predicts that a bad harvest raises the price. Reason: supply shifts left along a steep demand curve. Evidence: a fixed supply cut of 20% gave a 50% price rise. Counter-point: a stockpile or imports could soften the rise, and speculation could magnify it. Judgement: the direction is reliable, but the size depends on stocks, trade and expectations.

Must-know distinctions

• Sliding along a curve (the good’s own price) versus a shifted curve (any other cause).
• Surplus versus shortage.
• Joint supply versus competitive supply.
• Derived versus composite demand.
• Predicting direction versus predicting size.

Quick self-test

1. In your own words, define equilibrium.
2. Qd = 540 − 15P and Qs = −60 + 25P. What are the equilibrium price and quantity?
3. At £12, what is the shortage or surplus?
4. If demand rises by 40 at each price, what is the new equilibrium?
5. A bond pays £30 a year. What is its yield at a price of £400?
6. Demand for beef rises. What happens to the price of hides, and why?
7. Qd = 42 − P and supply falls from 30 to 24. By what percentage does the price change?
8. Name two assumptions of the supply and demand model.
9. Why might the cobweb pattern grow instead of settling?
10. Give one reason why the model fits housing less well than wheat.

Answers

1. Buyers and sellers want to trade the same quantity at the going price.
2. £15 and 315.
3. A shortage of 120 (Qd 360, Qs 240).
4. £16 and 340.
5. 7.5%.
6. It falls. More cattle are reared, so hide supply shifts right.
7. The price rises from £12 to £18, up 50%.
8. Any two from rational behaviour, homogeneous goods, many buyers and sellers, full information, flexible prices, ceteris paribus.
9. Supply responds more strongly to last period’s price than demand responds to this period’s price.
10. Each home is different, so no single price or market exists. Credit, planning limits and expectations also matter.

Where marks are usually lost

• Shifting a curve when the question describes only a change in the good’s own price.
• Writing “price goes up” without naming the curve that moved and the reason.
• Giving both price and quantity as certain when demand and supply both shift.
• Naming a related market without saying whether the link is substitute, complement or joint supply.
• Writing “the model is unrealistic” without naming which assumption fails and what difference it makes.
• Describing a shortage without saying what happens next, such as queues or higher prices.
• Using a formula where the working does not show the substitution step.
• Stopping an evaluation at one side of the argument, without a judgement.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), first assessment 2021. Content of Component 1: Microeconomics, area of study “How competitive markets work”.