OCR GCSE Economics: Markets, specialisation, demand and elasticity (J205)

This guide teaches sections 2.1 (The role of markets) and 2.2 (Demand) of Topic 2 in the OCR GCSE (9-1) Economics specification (J205), Version 2.0 (June 2026). The course is untiered: one set of content applies to every candidate. All numbers, firms and countries below are invented for practice and labelled as illustrative.

Pair it with the revision notes and the practice questions. For the wider topic, see the Topic 2 overview page, the course hub and the printable checklist. To find your weak spots first, use the diagnostics.

What you must be able to do

Section	Outcome
2.1	Explain what a market is
2.1	Explain features of the primary, secondary and tertiary sectors, including goods versus services
2.1	Explain factor and product markets and their interdependence
2.1	Weigh up the gains and drawbacks of specialising and trading, for firms, employees, areas and nations
2.2	Explain demand; draw and explain individual and market demand curves using data
2.2	Draw shifts and movements; analyse what causes them and what follows for buyers and sellers
2.2	Explain price elasticity of demand (PED); sketch curves of differing elasticity; judge why PED matters to buyers and sellers

2.1 Markets

A market exists wherever buyers meet sellers and swap a good, service or resource for payment. It need not be a place. A farmers’ stall, a website that sells second-hand bikes and a job-search service are all markets. In each one, buyers and sellers agree a price and exchange.

The three sectors

Sector	What happens	Examples (illustrative)
Primary	Extracting or growing natural resources	Farming, fishing, quarrying, forestry
Secondary	Manufacturing and construction: turning raw materials into finished products	Car assembly, bread-making, house building
Tertiary	Providing services	Retail, teaching, banking, transport

Goods versus services. Goods are physical items: you can touch them, store them and own them after the sale. Services are intangible: a haircut or a bus journey is produced and consumed at the same time and cannot be stored. The primary and secondary sectors produce goods. The tertiary sector produces services.

Worked example (Country A, illustrative). Total employment rises from 10 million in Year 1 to 12 million in Year 30. Shares of jobs:

Sector	Year 1	Year 30
Primary	20%	5%
Secondary	35%	25%
Tertiary	45%	70%

Tertiary jobs: 45% of 10 million = 4.5 million in Year 1; 70% of 12 million = 8.4 million in Year 30. Change = (8.4 − 4.5) ÷ 4.5 × 100 = +86.7%. Primary jobs fall from 2.0 million to 0.6 million, a fall of 70%. Notice that a falling share is not always a falling number: secondary jobs fall from 3.5 million to 3.0 million, but only by 14.3%, because total employment grew.

Factor markets and product markets

Factor markets are where the factors of production (land, labour, capital and enterprise) are bought and sold. Firms are buyers and households are sellers: a household sells its labour and receives a wage. Product markets are where finished goods and services are bought and sold. Households are buyers and firms are sellers.

They are interdependent in two ways:

1. Income earned in factor markets (wages, rent, interest, profit) is spent in product markets. Households with no jobs cannot buy much.
2. Firms only hire factors if they expect to sell the output. Demand for labour is a derived demand: if demand for houses falls, builders need fewer bricklayers.

Example: A small bakery (illustrative) hires two bakers in the labour market (a factor market). It pays wages. The bakers spend part of their wages on bread, shoes and rent in product markets. If customers stop buying bread, the bakery cuts hours, wage income falls and spending elsewhere falls too.

Specialisation and exchange

Specialisation is when a producer, worker, region or country focuses on a narrow set of tasks or products. Exchange is then needed, because nobody makes everything they want. Money allows exchange without the double coincidence of wants that barter needs.

Worked example (a stool workshop, illustrative). Four workers each build whole stools and make 3 a day: 12 in total. If they specialise in cutting, assembling, sanding and finishing, output rises to 20 a day.

• Output rises by (20 − 12) ÷ 12 × 100 = 66.7%; output per worker rises from 3 to 5.
• Wages are £80 each: £320 a day. Labour cost per stool falls from £320 ÷ 12 = £26.67 to £320 ÷ 20 = £16.00, a fall of 40%.

Who	Benefits	Costs
Producers	Higher output per worker, lower unit costs, larger scale, higher profit potential	Reliance on one product or on suppliers; a breakdown at one stage can halt everything; training costs
Workers	Skills improve with practice; higher productivity can support higher pay	Repetitive, boring work; narrow skills make it hard to switch jobs; risk of unemployment
Regions	Concentration builds skills, suppliers and reputation; jobs and incomes	One industry in decline can leave the whole region with high unemployment
Countries	Greater output and wider choice through trade; efficient use of resources	Dependence on imports; exposure to world price falls; loss of industries that cannot compete

Evaluation chain. Specialisation raises productivity, so unit costs fall, so firms can lower prices or raise profit. But the gains depend on demand: if the single product falls out of fashion, specialised workers and regions suffer most. The size of the benefit also depends on how easily workers can retrain, and on how many different industries a region or country has. A balanced judgement says specialisation is likely to raise living standards overall, but diversification and training reduce the risks.

2.2 Demand

Demand is the amount of a product that people want and have the money to buy at each price, measured over a set time. Wanting a car is not demand; you must also have the means to pay.

The law of demand: as price falls, quantity demanded rises, other things being equal. This gives a downward-sloping curve. Reasons: lower prices make the good cheaper than substitutes, and existing buyers can afford more.

Individual and market demand

An individual demand curve shows one consumer. Market demand adds up every buyer’s quantity at each price. Illustrative weekly demand for pizzas in Town T (assume only three buyers):

Price (£)	Ana	Bilal	Cara	Market
12	1	0	2	3
10	2	1	3	6
8	3	2	4	9
6	4	3	6	13
4	5	5	8	18

To draw it, put price (£) on the vertical axis and quantity demanded per week on the horizontal axis, plot the pairs (3, 12), (6, 10), (9, 8), (13, 6), (18, 4) and join them. Label the curve D. Roughly:

Price
12 |*
10 |   *
 8 |      *
 6 |           *
 4 |                  *
   +------------------------ Quantity

Movements along and shifts of the curve

If only the good’s own price alters, you move along the same curve: an extension when price falls (from £10 to £8, quantity rises from 6 to 9) or a contraction when price rises.

A change in any other factor shifts the whole curve. Moving the curve right is an increase in demand (extra purchases at every price); moving it left is a decrease.

Cause of a shift	Effect on demand
Rise in incomes (normal good)	Increase
Rise in incomes (inferior good)	Decrease
A rival substitute becomes dearer	Increase
A complement becomes dearer	Decrease
Fashion, tastes, advertising	Increase or decrease
Population or its age structure changes	Either
Expectations (a price rise expected soon)	Increase now
Seasons and weather	Either

Worked example. A local advert adds 3 pizzas a week at every price: market demand becomes 6, 9, 12, 16, 21. At £8, demand rises from 9 to 12, an increase of 33.3%. The price did not change, so this is a shift, not a movement.

Consequences for consumers and producers

If demand shifts right and supply does not change, there is a shortage at the old price. Producers can sell more, raise their prices, earn more revenue and may hire more workers or expand. Consumers may find the good dearer or have to compete for stock. A shift left has the opposite effects: unsold stock, price cuts, lower revenue and possible job losses. A price cut (a movement) raises quantity bought; the effect on revenue depends on PED.

Price elasticity of demand

PED shows how strongly buyers react, in quantity, when the price moves.

PED = quantity change (%) ÷ price change (%)

Work every percentage change from the starting figure: change ÷ original × 100. PED usually comes out negative, since price and quantity demanded move opposite ways; you can quote its size and drop the sign.

PED (size)	Name	Meaning
0	Perfectly inelastic	Quantity does not change; vertical curve
Between 0 and 1	Inelastic	Quantity changes proportionately less than price; steep curve
1	Unitary	Changes are equal in size
Over 1	Elastic	Quantity changes proportionately more than price; shallow curve
Infinite	Perfectly elastic	Any price rise sends demand to zero; horizontal curve

Sketches of the shapes (price vertical, quantity horizontal): perfectly inelastic is a vertical line; perfectly elastic is a horizontal line; inelastic is a steep downward line; elastic is a shallow downward line. Slope is only a guide: along one straight line, PED changes. From the pizza table, £8 to £6: price −25%, quantity +44.4%, PED = −1.78 (elastic). From £6 to £4: price −33.3%, quantity +38.5%, PED = −1.15 (less elastic).

Worked example 1. A café (illustrative) raises a coffee from £3.00 to £3.30 (+10%). Weekly sales fall from 400 to 380 (−5%). PED = −5 ÷ 10 = −0.5: inelastic.

Worked example 2. A concert ticket falls from £40 to £36 (−10%). Sales rise from 500 to 650 (+30%). PED = 30 ÷ −10 = −3.0: elastic.

Using a given PED. If PED = −0.4 and price rises 15%, quantity falls 0.4 × 15 = 6%.

What decides PED

• Substitutes: more and closer substitutes mean more elastic.
• Necessity or luxury: necessities are inelastic; luxuries are elastic.
• Share of income: a small cost (salt) is inelastic; a large one (a holiday) is elastic.
• Time: over a longer period, buyers find alternatives, so demand is more elastic.
• Addiction or habit: raises inelasticity.
• How the good is defined: one brand of cola is more elastic than cola in general.

Importance of PED

Total revenue = price × quantity. For a producer:

Demand	Price rise	Price fall
Inelastic (PED below 1)	Takings go up	Takings go down
Elastic (PED above 1)	Takings go down	Takings go up

Check with example 1: before 3.00 × 400 = £1,200; after 3.30 × 380 = £1,254. Check with example 2: £20,000 before, 36 × 650 = £23,400 after. Another: PED = −0.4, price £3.00 to £3.45, sales 2,000 to 1,880; revenue £6,000 to £6,486. If PED is exactly 1, revenue stays roughly the same.

For producers, PED guides pricing, forecasting sales after a price change, and deciding between sales and promotions. For consumers, inelastic demand means a price rise takes a bigger bite out of budgets because they cannot easily cut back. Buyers of necessities are hit hardest.

Evaluation. Revenue is not profit: selling more costs more to make, so a price cut on an elastic good may not raise profit. PED is an estimate from past data, can change over time, and depends on rivals’ reactions. A reasonable judgement: use PED as a guide, then check costs and competitors before changing price.

Common errors

• Calling a price-driven change a “shift”.
• Dividing by the new value rather than the original.
• Treating PED of −2 as inelastic because it is negative.
• Saying a steep curve means the same elasticity at every point.
• Confusing revenue with profit.
• Describing factor markets as markets for finished goods.

Official syllabus

Source: Cambridge OCR, GCSE (9-1) Economics specification (J205), Version 2.0 (June 2026), for first assessment in 2019. Covered here: 2.1 and 2.2.