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

Every figure below is invented and illustrative. This guide follows the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), first assessment 2021. It covers the second half of the topic “Supply and demand and the interaction of markets”, in the area of study “How competitive markets work” within Component 1, Microeconomics. The whole specification is A Level. Demand, supply, surplus and elasticity have their own pages, so this one starts from the curves and asks what happens when they meet.

Use the OCR A Level Economics hub and the printable checklist to track progress, and the Microeconomics overview for the wider course. Companion pages: revision notes and practice questions. When you want to find weak spots first, try the free diagnostics.

What this unit covers

Specification outcome	Section below
Equilibrium in product, financial and factor markets, with a diagram	1
Moving from one equilibrium to another when demand or supply change	2
Impact of a change in one market on related markets	3
Causes and consequences of disequilibrium	4
Why price and output of some goods are volatile	5
Usefulness of the model for commodities, housing and transport	6
Assumptions, techniques, predicting behaviour, usefulness and limitations	7

1. Equilibrium in three kinds of market

A market is in equilibrium when quantity demanded equals quantity supplied at the going price. No buyer or seller who is willing to trade at that price is left out, so there is no pressure for the price to change.

On a diagram, put Price on the vertical axis and Quantity on the horizontal axis. The demand curve slopes down and the supply curve slopes up, and they cross at the equilibrium point. Read across from that point for price and down for quantity.

Product market (worked example). In a small town the weekly market for jars of honey is: Qd = 640 − 20P and Qs = −60 + 30P, with P in pounds and Q in jars.

Qd = Qs  →  640 − 20P = −60 + 30P
700 = 50P  →  P = 14
Q = 640 − 20(14) = 360   (check: −60 + 30(14) = 360)

Equilibrium is £14 and 360 jars.

Financial market. The market for loanable funds has the interest rate (r, in %) as its price. Borrowers demand funds and savers supply them. Illustrative: Ld = 900 − 50r and Ls = 300 + 100r, in £ million.

900 − 50r = 300 + 100r  →  600 = 150r  →  r = 4
Q = 900 − 50(4) = 700   (check: 300 + 400 = 700)

The equilibrium interest rate is 4% with £700 million lent. If households save £60 million more at each rate, Ls = 360 + 100r, so 540 = 150r and r = 3.6%, with £720 million lent.

A second financial market is for bonds. A bond that pays a fixed £50 a year gives a yield of 50/1,000 = 5.0% at a price of £1,000. If demand for the bond falls and its price drops to £800, the yield is 50/800 = 6.25%. A lower bond price means a higher yield.

Factor market. The labour market has the wage as its price. Firms demand labour, and workers supply it. Illustrative: Ld = 1,000 − 60w and Ls = −200 + 90w.

1,000 − 60w = −200 + 90w  →  1,200 = 150w  →  w = 8
L = 1,000 − 60(8) = 520   (check: −200 + 720 = 520)

Equilibrium is a wage of £8 an hour and 520 workers. Labour demand is a derived demand: firms hire because customers want what the workers make. If demand for the final product falls, labour demand shifts left. At Ld = 880 − 60w, 1,080 = 150w, so w = £7.20 and L = 448. The wage falls by 10% and employment by 13.85%.

2. From one equilibrium to another

Use this routine every time.

1. Draw the original curves and label the equilibrium P0 and Q0.
2. Decide which curve shifts: demand, supply or both.
3. Decide the direction of the shift and give the reason, such as a change in income, tastes, costs or technology.
4. Draw the new curve and label the new equilibrium P1 and Q1.
5. State the changes in price and quantity, with a number if you have data.

Honey, demand rises. A rise in incomes or a fashion for local food adds 80 jars at each price: Qd = 720 − 20P. Then 780 = 50P, so P = 15.6 and Q = 408. Price rises 11.43% and quantity 13.33%.

Honey, supply falls. A poor flowering season removes 60 jars at each price: Qs = −120 + 30P. With the original demand, 760 = 50P, so P = 15.2 and Q = 336. Price rises 8.57% and quantity falls 6.67%.

Both together. Using both shifts, 840 = 50P, so P = 16.8 and Q = 384. Price is up 20%. The price rise is certain, but the quantity change depends on relative size. With demand up 80, supply would have to fall by 120 at each price to leave output at 360.

Demand up, supply up    : Q up, P uncertain
Demand up, supply down  : P up, Q uncertain
Demand down, supply up  : P down, Q uncertain
Demand down, supply down: Q down, P uncertain

A movement along a curve comes only from a change in that good’s own price; every other cause shifts the curve.

3. Impact on related markets

Markets are linked, so a shock in one market passes to others. Evaluate the size of each link.

Relationship	Example chain
Substitutes	Honey price up, so demand for jam shifts right and the jam price rises
Complements	Demand for printers falls, so demand for ink cartridges shifts left
Joint supply	Demand for mutton rises, farmers rear more sheep, wool supply shifts right and the wool price falls
Competitive supply	Wheat price up, so farmers switch land from barley and barley supply shifts left
Composite demand	Milk is demanded for cheese and for butter, so more cheese production leaves less milk for butter
Derived demand	Fewer new houses built, so demand for bricks and for builders falls

Worked example (substitutes). Suppose the jam market is Qd = 400 − 20Pj + 5Ph and Qs = −50 + 30Pj, where Pj and Ph are the prices of jam and honey. At Ph = £14, 470 − 20Pj = −50 + 30Pj, so Pj = £10.40 and Q = 262. When honey rises to £15.20, 476 − 20Pj = −50 + 30Pj, so Pj = £10.52 and Q = 265.6. The jam price rises 1.15% and quantity 1.37%. The link is real but small, because jam is only a loose substitute.

The strength of a knock-on effect depends on how close the goods are, how long the change lasts, how much spare capacity there is, and whether the second market has its own larger shocks.

4. Disequilibrium: causes and consequences

Disequilibrium means quantity demanded differs from quantity supplied at the current price.

At £18 in the honey market, Qd = 280 and Qs = 480. There is a surplus (excess supply) of 200 jars. At £10, Qd = 440 and Qs = 240, a shortage (excess demand) of 200 jars.

Causes include:

• a sudden shift of demand or supply, before prices have adjusted;
• sticky prices, such as contracts or posted ticket prices;
• a price set above or below equilibrium by a producer or by government.

Consequences depend on the direction.

• Surplus: unsold stock, falling prices, cuts in output and waste of perishables.
• Shortage: queues, waiting lists, rationing by luck or connections, and resale at high prices.

In a free market, a surplus pulls the price down and a shortage pushes it up. The adjustment takes time, and how long is part of the evaluation.

5. Why price and output can be volatile

Volatility means large and frequent changes in price or output. It is most likely when both demand and supply are inelastic, when supply cannot respond quickly, and when shocks are common.

Agricultural example. Suppose supply in one season is fixed by the harvest (a vertical supply curve) and demand is Qd = 170 − 5P.

Harvest (units)	Price (£)	Change in output	Change in price	Farmers’ revenue (£)
120 (normal)	10.00	-	-	1,200
100 (poor)	14.00	−16.67%	+40%	1,400
140 (bumper)	6.00	+16.67%	−40%	840

A 16.67% change in output produces a 40% change in price. If demand were more elastic, Qd = 320 − 20P, the same harvests would give prices of £10, £11 and £9, a swing of only 10%. Steep curves magnify shocks. The revenue column shows a further point: a bumper crop can leave farmers worse off.

Time lags and the cobweb. When producers plant according to last year’s price, supply responds late. Suppose Qd = 210 − 6P and Qs = 30 + 3P(last year). Equilibrium is P = £20 and Q = 90. After a start at P = £24, prices run £18, £21, £19.50, £20.25 and £19.875, which gives cycles that gradually settle. If supply responds more strongly than demand does, the cycles grow instead.

Other causes. Weather and disease, speculation that amplifies price moves, swings in global demand, and the cost of storing perishable goods.

6. Usefulness of the model: commodities, housing and transport

Market	Why the model fits	Why it fits less well
Commodities	Standardised goods, many buyers and sellers, prices adjust quickly, shocks are easy to read	Speculation, buffer stocks, producer agreements and long supply lags
Housing	Explains why a rise in demand raises prices when supply is slow to respond	Each house is different, buying is costly and infrequent, credit availability matters, planning rules limit supply, and expectations drive demand
Transport	Shows how peak demand against fixed capacity creates pressure on price	Subsidies and regulated fares, congestion costs imposed on others, and complements across networks

Housing (worked example). The stock of homes is fixed at 800 in the short run, with demand Qd = 2,000 − 10P (P in £ thousand). Equilibrium is P = 120. If easier credit lifts demand to Qd = 2,100 − 10P, price rises to £130 thousand (+8.33%) and quantity stays at 800 until builders respond. The model predicts the short-run effect well but says little about how long building takes.

Transport (worked example). A train has 600 seats. Peak demand is Qd = 1,000 − 40P and off-peak demand is Qd = 700 − 40P. At a flat £6 fare, peak demand is 760, so 160 passengers cannot be seated. Off-peak demand is 460, leaving 140 empty seats. Market-clearing fares would be £10 at peak and £2.50 off-peak. The model explains higher peak fares but not the congestion costs travellers impose on each other.

7. Assumptions, techniques and judgement

Assumptions of the model:

• consumers and firms behave rationally;
• the good is homogeneous;
• there are many buyers and sellers, each too small to influence price;
• buyers and sellers have full information;
• prices are flexible and markets clear;
• ceteris paribus, so only one factor changes at a time;
• no external costs or benefits.

Techniques you can use to operate the model: diagrams, demand and supply schedules, algebra with linear equations, percentage-change calculations and comparative statics (comparing two equilibria).

Predicting behaviour. The model gives a direction of change, such as “price will rise”, and sometimes a size. Predictions are conditional: they hold if the assumptions hold and nothing else changes.

Evaluation points:

• It is a simplification, which makes it clear and easy to apply but unrealistic.
• Ceteris paribus rarely holds, because several things change at once.
• It is static, while real markets adjust over time.
• It fits some markets (commodities) far better than others (housing, with its differences between homes).
• Rationality and full information are open to doubt.
• It works best as a starting point, alongside evidence about the specific market.

Common errors

• Shifting a curve when only the price has changed. Show a movement along the curve instead.
• Stating the direction of both price and quantity when two curves shift, even where one result is uncertain.
• Treating a surplus or shortage as permanent in a free market, without discussing the speed of adjustment.
• Describing a related-market effect without saying whether the goods are substitutes, complements or in joint supply.
• Listing limitations without judging how serious they are for the market in the question.

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”, topic “Supply and demand and the interaction of markets”.