OCR GCSE Economics: Supply, price elasticity of supply and price determination (J205)

Sections 2.3 (Supply) and 2.4 (Price) of Topic 2, The role of markets and money, are covered here for OCR GCSE (9-1) Economics (J205), using version 2.0 of the specification (first assessment 2019). The content sits in Component 01, Introduction to Economics (J205/01). Nothing in this unit is tiered, so every candidate needs all of it. All numbers in the examples are invented.

Once you have read this, move on to the revision notes and then the practice questions. For progress tracking there are the course hub and the printable checklist; the free diagnostics take ten minutes.

What you must be able to do

Section	Outcome in the specification
2.3	Explain supply; draw and explain a supply curve from data, individual and market
2.3	Show shifts of, and movements along, the supply curve; work through why they happen and what they mean for buyers and sellers
2.3	Explain price elasticity of supply (PES); sketch supply curves with different elasticities; judge why PES matters to buyers and sellers
2.4	Explain why price shows worth and how it helps resources go where they are valued
2.4	Explain equilibrium price and quantity; draw and analyse the interaction of demand and supply
2.4	Explain the role of markets in determining price and allocating resources; analyse how demand and supply forces change equilibrium

2.3 Supply

Supply means the amount producers choose, and have the means, to put on sale at each possible price during a stated period. “Willing” means it is worth their while; “able” means they have the resources to do it. The law of supply says that, other things equal, a higher price means a larger quantity supplied. Higher prices raise revenue per unit, so producers can cover rising costs and still make a profit, and new producers are drawn in.

Individual and market supply

A supply schedule is a table of price against quantity supplied. A market supply schedule adds up the quantities of every producer at each price. The data below are for loaves of bread in one town (illustrative).

Price per loaf	Larch Bakery	Brook Bakery	Corner Bakery	Market supply
£2.00	30	20	10	60
£2.50	50	35	20	105
£3.00	70	50	30	150
£3.50	90	65	40	195
£4.00	110	80	50	240

At £3.00: 70 + 50 + 30 = 150. Add more bakeries and the market supply is larger at every price.

Drawing the curve from data. Price goes up the side and quantity along the bottom. Use an even scale, plot each pair, join the points with a ruler and label the line S. Label the axes with units (price in £, quantity in loaves per day).

Price (£)
 4.00 |                    x
 3.50 |               x
 3.00 |          x
 2.50 |     x
 2.00 | x
      +--------------------------  Quantity per day
        60  105  150  195  240

Movements and shifts

A change in the price of the good itself causes a movement along the curve: an extension (price up, quantity supplied up) or a contraction (price down, quantity supplied down). A change in any other influence moves the whole curve: a shift. A rightward shift is an increase in supply (more at every price); a leftward shift is a decrease.

Causes of shifts:

• Input costs such as pay, materials, power and premises: dearer inputs shift supply left, cheaper ones shift it right.
• Technology: better machinery lowers cost per unit and shifts supply right.
• Taxes on production shift supply left; subsidies shift it right.
• Number of producers: entry shifts supply right, exit shifts it left.
• Weather and natural events, especially for farming.
• Prices of other goods a producer could make instead, and producers’ expectations of future prices.

Consequences for consumers and producers

Worked example: a cost rise. Suppose the price of flour rises so that the bakeries supply 48 fewer loaves at every price. With the demand schedule below, the market moves as follows.

Price	Demand	Old supply	New supply
£3.00	150	150	102
£3.20	120	168	120
£3.50	75	195	147

Old equilibrium: £3.00 and 150 loaves. At £3.00 the new supply is 102, so demand exceeds supply by 48 and price rises. At £3.20 both are 120, so the new equilibrium is £3.20 and 120 loaves.

• Consumers face a price 6.7% higher ((3.20 − 3.00) ÷ 3.00 × 100) and buy 20% fewer loaves ((120 − 150) ÷ 150 × 100).
• Producers’ total revenue (price × quantity) falls from £3.00 × 150 = £450 to £3.20 × 120 = £384, a fall of 14.7%, while their costs have risen. Profit is squeezed, and some bakeries may leave.

Elasticity of supply in numbers

Price elasticity of supply (PES) shows how far output offered moves when price moves.

PES = percentage rise in output offered ÷ percentage rise in price

Worked example. Price rises from £3.00 to £3.50 and market supply rises from 150 to 195.

• % change in price = (0.50 ÷ 3.00) × 100 = 16.7%
• % change in quantity = (45 ÷ 150) × 100 = 30%
• PES = 30 ÷ 16.7 = 1.8

Supply is elastic when PES is above 1, because quantity responds more than price. It is inelastic when PES is between 0 and 1. A farm that raises price by 20% and supplies 5% more has PES = 5 ÷ 20 = 0.25. Unit elastic supply has PES = 1.

Supply curves of different elasticity

Perfectly      Perfectly     Unit elastic     Elastic        Inelastic
inelastic      elastic       (PES = 1)        (PES > 1)      (PES < 1)
(PES = 0)      (PES = ∞)
 |  S           |             |     /S         |    /S        |      / S
 |  |           |             |    /           |   /          |     /
 |  |           |----S----    |   /            |  /           |    /
 |  |           |             |  /             | /            |   |
 +------ Q      +------ Q     +------ Q        +------ Q      +------ Q
Vertical       Horizontal     Straight line   Meets the      Meets the
               line           through origin  price axis     quantity axis

Any straight supply curve that would pass through the origin if extended has a PES of 1 along its whole length. One that would meet the price axis above zero is elastic; one that would meet the quantity axis is inelastic.

What decides PES

• Spare capacity: unused machines and staff allow output to grow fast, which makes supply flatter.
• Stocks: firms holding unsold goods can release them.
• Time: given months or years, firms can build, hire and train, so supply becomes more responsive.
• Factor mobility: if workers and materials move easily between uses, supply is elastic.
• Production period: crops that take a season to grow have inelastic supply; fast-made goods are elastic.
• Perishability: goods that cannot be stored cannot be held back and released.

Why PES matters

Worked comparison. Two markets (illustrative) start at £10 and 110 units. Demand then rises by 48 units at every price.

Price	Demand now	Supply, market X (inelastic)	Supply, market Y (elastic)
£10	158	110	110
£11.50	143	113	143
£14	118	118	198

Market X settles at £14 and 118 units: price +40%, quantity +7.3%. Market Y settles at £11.50 and 143 units: price +15%, quantity +30%. Between £10 and £12 the PES values are 0.18 for X and 2.0 for Y.

• Consumers: with inelastic supply a demand rise mostly raises prices and shortages persist; with elastic supply they get more goods at a smaller price rise.
• Producers: elastic supply lets them take advantage of rising demand quickly; inelastic supply means they cannot, and a price fall leaves them stuck with output they cannot cut easily.
• Evaluation: PES is not fixed. It changes with time, stocks and spare capacity, so the size of any benefit depends on how long the period is and whether firms can afford to expand. Planning decisions (hiring, storage, investment) are easier for firms that know their own PES.

2.4 Price

Price as a reflection of worth

A price shows what buyers are willing and able to pay and what it costs to produce. It performs three jobs:

• Signal: a rising price tells producers that consumers want more and tells consumers that the good is becoming scarcer.
• Incentive: higher prices reward producers for supplying more; lower prices encourage consumers to buy more.
• Rationing: when a good is scarce, price decides who gets it, namely those who are willing and able to pay.

Together, these direct resources towards goods that consumers value most. That is the role of price in an efficient distribution of resources: land, labour and capital move to uses where people are willing to pay for the output. A limit: price reflects willingness and ability to pay, so a person with greater need but little income can be priced out.

Equilibrium

Equilibrium is the point where buyers want exactly as much as sellers offer. Its price is the equilibrium price; its output is the equilibrium quantity. In the bread market, with demand of 300, 225, 150, 75 and 0 at the five prices:

• At £2.00 demand (300) exceeds supply (60): excess demand (shortage) of 240. Buyers compete, so price rises.
• At £4.00 supply (240) exceeds demand (0): excess supply (surplus) of 240. Sellers cut prices to clear stock.
• At £3.00 both are 150: equilibrium.

On a diagram, equilibrium is the point where the downward-sloping demand curve D crosses the upward-sloping supply curve S. Read across to the price axis for the price and down to the quantity axis for the quantity.

The role of markets

In a market economy, millions of buying and selling decisions determine what is produced, how and for whom, with no central planner. The price mechanism moves price towards equilibrium, which allocates resources to where demand is. Markets can fail to give fair outcomes, however, and may not reflect effects on people outside the transaction.

How market forces change equilibrium

Use the same four steps every time.

1. Identify the cause and decide whether it affects demand or supply.
2. Decide whether the curve shifts right or left.
3. Find the new intersection and state the new price and quantity.
4. Apply the result to consumers and producers.

Change	Price	Quantity
Demand up (D shifts right)	Up	Up
Demand down	Down	Down
Supply up (S shifts right)	Down	Up
Supply down	Up	Down

Common errors

• Writing “supply” shifts when only the price changed.
• Calculating PES without turning the changes into percentages first.
• Saying “elastic” when PES is 0.4.
• Showing a shift on a diagram without labelling the new curve and the new equilibrium.
• Describing a new price without stating what happens to quantity.

Official syllabus

OCR GCSE (9-1) Economics (J205). Version 2.0, June 2026. First assessment 2019. The checklist used here is Topic 2, sections 2.3 and 2.4.