OxfordAQA International AS and A-level Economics: Prices and linked markets (9640) – Revision Notes

Quick recall for OxfordAQA International AS and A-level Economics (9640), specification version 1.2, sections 3.1.2.5 to 3.1.2.7 (International AS content, so also part of the International A-level). For full explanations use the study guide, then test yourself with the practice set. Course pages: the OxfordAQA A-level Economics hub and the checklist. A free diagnostic will show what to revise first. All figures are invented and illustrative.

3.1.2.5 Determination of market prices

Definitions

Term	Meaning
Equilibrium	Buyers and sellers want the same amount; price has no reason to move
Disequilibrium	Any price where the two differ
Excess demand	Buyers want more than sellers offer (price below equilibrium)
Excess supply	Sellers offer more than buyers want (price above equilibrium)

Method: find equilibrium

1. Equate the two equations.
2. Solve for price.
3. Put that price into each equation to get the quantity and confirm both agree.
4. For a shift, rewrite the changed equation (add or subtract the shift at every price) and repeat.

Reminder (Fish market, illustrative). Qd = 360 − 20P and Qs = −40 + 20P. Then 400 = 40P, so P = 10 and Q = 160.

Price	Qd	Qs	Result
7	220	100	Excess demand 120
10	160	160	Equilibrium
14	80	240	Excess supply 160

If demand falls by 40 at every price, Qd = 320 − 20P, so P = 9 and Q = 140: price down 10%, quantity down 12.5%.

Adjustment chain. Excess supply: unsold stock builds, sellers cut price, buyers take more (extension) and some sellers cut output (contraction), until the gap is zero. Excess demand: buyers compete, sellers raise price, quantity supplied extends, quantity demanded contracts.

Elasticities and the size of the price change. The same shift moves price more when the other curve is steep (unresponsive) and moves quantity more when it is flat. Say which curve is steep, then say what that means for price and quantity.

Commodity prices. Supply depends on weather and harvests. Short-run demand and supply both respond little to price, so small shifts cause large price swings. If demand is unresponsive, a bumper harvest can cut farmers’ revenue because price falls by more than quantity rises.

Reminder (Crop M, illustrative). Demand is Qd = 300 − 10P. Normal supply is Qs = 40 + 10P, so 260 = 20P, P = 13, Q = 170, and farmers’ revenue is 13 × 170 = 2,210. A bumper harvest adds 30 at every price: Qs = 70 + 10P, so P = 11.5 and Q = 185. Price falls 11.5% but quantity rises only 8.8%, so revenue falls to 11.5 × 185 = 2,127.5, down 3.7%. A bigger harvest has made farmers worse off in total.

Speculation. Buying or selling to profit from expected price changes. Expecting a rise leads to buying now, which raises demand and price; this can be self-fulfilling and build a bubble. Speculators can also stabilise prices by buying cheap and selling dear. Evaluation: it depends on whether traders follow fundamentals or follow each other.

3.1.2.6 Interrelationship between markets

Term	Meaning	Direction to state
Competitive demand	Substitutes	Price of A up, demand for B up
Joint demand	Complements	Price of A up, demand for B down
Composite demand	One good with several uses	More demand from one use leaves less for the others
Derived demand	Demand that comes from demand for something else	Falls and rises with that product
Joint supply	Several goods from one process	More of one means more of the other

Reminders

• Joint demand: a printer maker sells 5,000 printers a year and each buyer needs 3 cartridges a year, so 15,000 cartridges. If printer sales rise 20% to 6,000, cartridge demand rises to 18,000.
• Joint supply: a sawmill produces planks and sawdust. If demand for planks rises, more logs are sawn, sawdust output rises, the supply curve for sawdust shifts right and its price falls.
• Composite demand: grain used for food and for animal feed. A rise in feed demand raises the price and cuts the quantity left for food.
• Derived demand: the demand for steel comes from demand for cars and buildings. The demand for a worker comes from demand for what the worker makes.

Worked chain. A rise in the price of petrol leads some drivers to use trains. Competitive demand: the demand curve for train travel shifts right and fares rise. Joint demand: fewer car journeys mean less demand for car parking, which shifts left. Derived demand: fewer car journeys also cut demand for petrol-station labour. Limit: the effect on trains is small if few drivers live near a station.

Method for linked markets. (1) Name the initial change and the curve it moves. (2) State the new price in that market. (3) Name the link (substitute, complement, joint supply, and so on). (4) State which curve moves in the second market, in which direction, and the result for its price and quantity. (5) Add a limit, such as how close the substitutes are.

3.1.2.7 How prices allocate resources

Function	What it does	Quick example
Rationing	Allocates limited supply to those willing and able to pay	Supply is fixed at 90 and Qd = 250 − 10P, so price settles at 16; at 10, quantity demanded is 150, an excess of 60
Incentive	Higher profit encourages production; higher wages encourage labour supply	A rise in the price of a crop leads farmers to plant more of it
Signalling	Price changes carry information on scarcity and tastes	A price rise tells producers to expand and consumers to economise

Price mechanism and the basic problem. What to produce: shifts in demand and relative prices. How to produce: firms choose the lowest-cost method as input prices change. For whom: goods go to those with income and willingness to pay.

Advantages and disadvantages

Advantages	Disadvantages
Responds without central planning	Ignores those with no income
Rewards efficiency and enterprise	Under-provides some goods and ignores external costs
Many decisions coordinated with little information	Can allow monopoly power, instability and inequality
Wide consumer choice	May allocate in ways society judges unfair

Impersonal method. Prices apply the same rule to everyone, which removes favouritism. But the result reflects the distribution of income, so it is impersonal without being neutral.

Extending markets into new areas (for example, paying for priority access to a public service). Gains: lower queues, new funds, better signals of value. Costs: access based on income, and the activity may change in character. Judgement: depends on how essential the service is and how fair people think the rule is.

Must-know distinctions

• Movement along a curve (extension or contraction, caused by price) versus a shift (caused by another factor).
• Excess supply arises above the equilibrium price; excess demand arises below it.
• Joint demand (bought together) versus joint supply (made together).
• Composite demand (one good, many uses) versus derived demand (good wanted for what it helps make).
• Equilibrium versus a market that is simply stable for a while.

Quick self-test

1. In a market with Qd = 360 − 20P and Qs = −40 + 20P, find equilibrium price and quantity.
2. State the excess at a price of 14.
3. State the excess at a price of 7.
4. Demand changes to Qd = 320 − 20P. Find the new price and the percentage change in price and in quantity.
5. Milk is bought for drinking and for cheese making. What type of demand is this?
6. A printer firm sells 6,000 printers; each buyer needs 3 cartridges a year. How many cartridges are demanded?
7. A rising price tells farmers to grow more of a crop. Which function of the price mechanism is this?
8. Supply is fixed at 90 and demand is Qd = 250 − 10P. Find the price that rations the good.
9. Why does a rise in demand for planks tend to lower the price of sawdust?
10. Give one reason why the price mechanism may not be fully impersonal.

Answers

1. P = 10, Q = 160.
2. Excess supply of 160 (Qd = 80, Qs = 240).
3. Excess demand of 120 (Qd = 220, Qs = 100).
4. P = 9, Q = 140; price down 10%, quantity down 12.5%.
5. Composite demand.
6. 18,000.
7. Signalling (the profit it creates also gives an incentive).
8. 250 − 10P = 90, so P = 16.
9. More planks mean more sawing, so more sawdust: the supply curve shifts right and price falls.
10. Outcomes depend on the distribution of income, so people with more income get more of what is produced.

Where marks are usually lost

• Stating the equilibrium but not showing the substitution that checks both equations.
• Saying “demand rises” when the price fell and quantity demanded extended.
• Leaving out the direction of the shift in the related market.
• Mixing up excess supply and excess demand, or naming the wrong price (above or below equilibrium).
• Describing a speculation example without saying why it can be self-fulfilling.
• Listing rationing, incentive and signalling without applying each to the scenario.
• Assessing the price mechanism without a judgement or without a condition that the judgement depends on.
• Ignoring the elasticity of the curve that does not move.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, first teaching September 2020, first AS exams May/June 2021, first A-level exams May/June 2022. Published by OxfordAQA.