Demand, Supply and Market Equilibrium – Cambridge IGCSE/A‑Level Syllabus
1. The Demand Curve
1.1 What a shift means
A movement **along** the demand curve occurs when the price of the good itself changes.
A **shift** of the whole curve occurs when any other determinant (income, tastes, etc.) changes, so that at every possible price the quantity demanded is different.
1.2 Demand function (Cambridge notation)
\[
Q_d = f(P,\;I,\;T,\;P_s,\;P_c,\;E,\;N)
\]
P – price of the good (movement along the curve)
I – consumer income
T – tastes, preferences and fashion
P_s – price of a substitute
P_c – price of a complement
E – expectations about future price, income or availability
Example: If household income rises by 10 % and the quantity of restaurant meals demanded rises by 15 %, then
\(YED = 15\%/10\% = 1.5\) → restaurant meals are a normal, income‑elastic (luxury) good.
Example: The price of coffee rises by 20 % and tea demand rises by 5 %.
\(XED = 5\%/20\% = 0.25\) → tea and coffee are substitutes, but the relationship is weak.
2. The Supply Curve
2.1 What a shift means
A movement **along** the supply curve is caused by a change in the good’s own price.
A **shift** of the whole curve occurs when any other determinant (input costs, technology, etc.) changes, so that at every price the quantity supplied is different.
2.2 Supply function (Cambridge notation)
\[
Q_s = g(P,\;C_i,\;T_e,\;E,\;N_s,\;T_s)
\]
P – price of the good (movement along the curve)
C_i – input (factor) prices
T_e – technology and productivity
E – expectations about future price or costs
N_s – number of sellers
T_s – taxes, subsidies or regulations affecting producers
2.3 Determinants that shift supply
Determinant
Effect on supply
Direction of shift
Input (factor) prices (↑)
Higher production cost
Left
Technology (improvement)
Lower unit cost / higher productivity
Right
Expectations of higher future price
Producers hold back output now
Left
Number of sellers (↑)
More firms producing
Right
Taxes on production (↑)
Higher marginal cost
Left
Subsidies to producers (↑)
Lower effective cost
Right
Regulatory constraints (↑)
Higher compliance cost
Left
2.4 Price Elasticity of Supply (PES)
\[
PES = \frac{\%\;\Delta Q_s}{\%\;\Delta P}
\]
PES > 1 → supply is elastic (output can be increased quickly).
PES = 1 → unit‑elastic.
PES < 1 → supply is inelastic (output changes little when price changes).
Example: The price of wheat rises from £150 to £180 per tonne (20 % increase) and the quantity supplied rises from 1 million to 1.2 million tonnes (20 % increase).
\(PES = 20\%/20\% = 1\) → wheat supply is unit‑elastic in the short run.
3. Market Equilibrium and Welfare
3.1 Definition of equilibrium
Market equilibrium occurs where the quantity demanded equals the quantity supplied (the point where the demand and supply curves intersect). At this price (\(P_e\)) there is no tendency for the price to change.
Diagram: Demand (D) and Supply (S) intersect at equilibrium E (Pₑ, Qₑ). Shifts are shown by D₁→D₂ and S₁→S₂ with the new equilibrium E′.
4. Government Intervention in Markets
4.1 Taxes
Specific (per‑unit) tax: shifts the supply curve vertically upward by the tax amount.
Result: price paid by consumers rises, price received by producers falls; CS and PS both fall; tax revenue is a rectangle between the two new price lines.
4.2 Subsidies
Shift the supply curve downward (or the demand curve upward if the subsidy is to consumers).
Result: price to consumers falls, price received by producers rises; CS and PS increase; government outlay equals the area of the subsidy rectangle.
4.3 Price controls
Price ceiling (maximum price): set below equilibrium → creates a shortage (Q_d > Q_s). Example: rent control.
Price floor (minimum price): set above equilibrium → creates a surplus (Q_s > Q_d). Example: minimum wage.
4.4 Public goods and externalities (brief)
Public goods are non‑rival and non‑excludable; the market under‑provides them → government provision.
Negative externalities (e.g., pollution) shift the supply curve leftward to reflect the social cost; a tax equal to the marginal external cost can restore efficiency.
Diagram: Specific tax shifts supply from S₁ to S₂; the vertical distance equals the tax per unit.
Understanding how individual markets reach equilibrium and how government policies shift demand or supply is the foundation for the Aggregate Demand–Aggregate Supply (AD‑AS) model studied later in the syllabus (Topic 4). In the AD‑AS framework:
Changes in consumer confidence, fiscal policy or exchange rates shift the AD curve.
Technological progress, changes in resource prices or labour productivity shift the AS curve.
The interaction determines the macro‑variables of national income, inflation, unemployment and economic growth.
7. International Trade – A Quick Teaser (Topic 5)
When a country’s exchange rate falls, the price of its exports in foreign currency falls, shifting the **export supply curve** rightward and increasing export volume.
Import demand shifts leftward because foreign goods become relatively more expensive.
These shifts affect the balance of payments and can be illustrated with separate import‑export supply‑demand diagrams.
8. Further Reading / A‑Level Extensions
Utility theory, indifference curves and consumer equilibrium (Topic 7.1‑7.3).
Detailed analysis of the Balance of Payments, exchange rate systems and the impact of trade policies (Topic 12‑13).
Combined diagram: Right‑shift of demand (D₁→D₂) and right‑shift of supply (S₁→S₂) leading to a new equilibrium (E₂) with higher quantity and a price that depends on the relative magnitude of the shifts.
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