Cambridge AS & A Level Economics (9708) – Demand and Supply (Syllabus 2.1‑2.5)
This set of notes is designed to be exam‑ready. It follows the exact order of the syllabus, defines every required term, shows the relevant formulas, and provides concise examples and diagrams that you can copy straight into your answer.
1. Demand
1.1 Definition
Demand shows the relationship between the price of a good (P) and the quantity demanded (Qd), ceteris paribus (all other factors held constant). The curve slopes downwards because ΔQd/ΔP < 0.
1.2 Determinants of Demand (Syllabus 2.1‑2.4)
| Determinant | Effect on the demand curve |
|---|
| Income – normal good | ↑ income → right‑ward shift (increase in demand) |
| Income – inferior good | ↑ income → left‑ward shift (decrease in demand) |
| Population / number of buyers | More people → right‑ward shift |
| Tastes & preferences | More favourable → right‑ward shift |
| Expectations of future price | Expect higher future price → right‑ward shift today |
| Prices of related goods | Substitutes ↑ → right‑ward shift; Complements ↑ → left‑ward shift |
| Government policies that affect consumers (e.g., subsidies, tax rebates) | Increase disposable income or reduce effective price → right‑ward shift |
1.3 Elasticities of Demand
- Price elasticity of demand (PED) – measures the responsiveness of quantity demanded to a change in its own price.
Formula: PED = (%ΔQd) / (%ΔP) = (ΔQd/Qd) ÷ (ΔP/P)
Sign: PED is negative because the demand curve slopes downwards; in analysis we usually quote the
absolute value but retain the sign to remind us of the inverse relationship.
Interpretation:
- |PED| > 1 → elastic
- |PED| = 1 → unit‑elastic
- |PED| < 1 → inelastic
Example: A 10 % fall in price leads to a 15 % rise in quantity demanded → PED = –1.5 (elastic).
- Income elasticity of demand (YED) – shows how quantity demanded responds to a change in consumer income.
Formula: YED = (%ΔQ
d) / (%ΔI) = (ΔQ
d/Q
d) ÷ (ΔI/I)
Interpretation:
- YED > 0 → normal good (demand rises with income)
- YED < 0 → inferior good (demand falls with income)
- YED > 1 → luxury good (highly responsive)
- 0 < YED < 1 → necessity (less responsive)
Example: If income rises by 8 % and quantity demanded rises by 12 %, YED = 12/8 = 1.5 (luxury good).
- Cross‑price elasticity of demand (XED) – measures the response of demand for good A to a change in the price of good B.
Formula: XED = (%ΔQ
A) / (%ΔP
B)
Interpretation:
- XED > 0 → goods are substitutes
- XED < 0 → goods are complements
- Large |XED| indicates a strong relationship.
Example: A 5 % rise in the price of tea leads to a 3 % rise in coffee demand → XED = 3/5 = 0.6 (substitutes, moderately responsive).
1.4 Movement Along vs. Shift of the Demand Curve
- Movement along the curve: caused **only** by a change in the good’s own price. The curve itself does not move; the point on the curve changes, reflecting a new quantity demanded.
- Shift of the curve: caused by any **non‑price determinant** listed in 1.2 (income, tastes, expectations, etc.). At every price the quantity demanded is different, so the whole curve moves left (decrease) or right (increase).
2. Supply
2.1 Definition
Supply shows the relationship between the price of a good (P) and the quantity supplied (Qs), ceteris paribus. The curve slopes upwards because ΔQs/ΔP > 0.
2.2 Determinants of Supply (Syllabus 2.1‑2.4)
| Determinant | Effect on the supply curve |
|---|
| Input (factor) prices | ↑ input cost → left‑ward shift (decrease in supply) |
| Price of related inputs (substitute inputs) | ↑ price of a substitute input → left‑ward shift (more costly to produce) |
| Availability of raw materials | Scarcity → left‑ward shift; abundance → right‑ward shift |
| Technology | Improvement → right‑ward shift (increase in supply) |
| Expectations of future price | Expect higher future price → left‑ward shift today (producers hold stock) |
| Taxes & subsidies | Tax ↑ → left‑ward shift; Subsidy ↑ → right‑ward shift |
| Number of sellers | More sellers → right‑ward shift |
2.3 Elasticity of Supply (PES)
Formula: PES = (%ΔQ
s) / (%ΔP) = (ΔQ
s/Q
s) ÷ (ΔP/P)
Interpretation: PES measures how quickly producers can change output when price changes.
- In the short run some inputs (e.g., plant size) are fixed → PES tends to be low (inelastic).
- In the long run all inputs can be varied → PES is higher (more elastic).
Example: A 5 % rise in price causes a 20 % rise in quantity supplied → PES = 4 (very elastic supply, typical of a long‑run adjustment).
2.4 Movement Along vs. Shift of the Supply Curve
- Movement along the curve: caused **only** by a change in the good’s own price. Quantity supplied changes, the curve stays in place.
- Shift of the curve: caused by any non‑price determinant listed in 2.2. At each price the quantity supplied is different, so the whole curve moves left or right.
3. Equilibrium, Disequilibrium & Welfare
3.1 Market Equilibrium
Equilibrium occurs where the demand and supply curves intersect.
- Quantity demanded = Quantity supplied = Qe
- Market price = Pe
3.2 How Movements & Shifts Affect Equilibrium
| Change | Graphical effect | New equilibrium |
|---|
| Price falls (ceteris paribus) |
Movement down the demand curve & up the supply curve |
No new equilibrium unless the other curve also moves. |
| Right‑ward shift of demand |
D1 → D2 |
Pe rises, Qe rises. |
| Left‑ward shift of supply |
S1 → S2 |
Pe rises, Qe falls. |
| Simultaneous price change **and** a determinant change |
First a movement along the original curve, then the whole curve shifts |
Two‑step adjustment: a temporary movement followed by a new equilibrium. |
3.3 Consumer & Producer Surplus
Consumer surplus (CS) = area between the demand curve and the market price, up to the quantity bought.
Producer surplus (PS) = area between the market price and the supply curve, down to the quantity sold.
Numerical example (linear market):
- Demand: Qd = 100 – 2P
- Supply: Qs = 20 + 3P
- Equilibrium: set Qd = Qs → 100 – 2P = 20 + 3P ⇒ Pe = 16, Qe = 68.
- CS = ½ × (price intercept of demand – Pe) × Qe = ½ × (50 – 16) × 68 = 1 156.
- PS = ½ × (Pe – price intercept of supply) × Qe = ½ × (16 – (–6.67)) × 68 ≈ 770.
These calculations are useful for data‑response questions where you are given a table of prices and quantities.
3.4 Dead‑Weight Loss (DWL)
A policy that moves the equilibrium away from the efficient point (e.g., a tax, price ceiling, or subsidy) creates a triangular area of DWL – a loss of total welfare.
3.5 Ceteris Paribus & Time‑frame
- Ceteris paribus – “all other things being equal”. It isolates the effect of a single variable.
- Short‑run vs. long‑run (Supply) – In the short run some inputs (plant, equipment) are fixed → supply is relatively inelastic. In the long run all inputs can be varied → supply becomes more elastic.
- Short‑run vs. long‑run (Demand) – Consumers may need time to adjust habits, form expectations, or change income levels; thus short‑run demand can be less responsive to income or price changes than long‑run demand.
4. Comparison: Movement Along a Curve vs. Shift of a Curve
| Aspect | Movement Along the Curve | Shift of the Curve |
|---|
| Trigger |
Change in the good’s own price |
Change in any non‑price determinant (see tables 1‑2) |
| Result |
Only quantity demanded or supplied changes |
Demand or supply at every price changes |
| Graphical representation |
Arrow from one point to another on the same curve |
Entire curve moves left or right |
| Effect on equilibrium |
New equilibrium only if the other curve also moves |
Creates a new equilibrium price and quantity |
| Elasticity relevance |
PED or PES explains the size of the movement |
Income elasticity (YED), cross‑price elasticity (XED) or other determinant‑specific factors explain the magnitude of the shift |
5. Worked Diagram: Price Change Followed by a Determinant Shift
Consider a market for smartphones.
- Step 1 – Price fall: A technological breakthrough reduces production cost, causing the market price to fall from £600 to £500. This is a movement down the original supply curve (S1) and up the original demand curve (D1), leading to a temporary new point (E′).
- Step 2 – Change in consumer income: Consumer incomes rise, shifting the demand curve rightward from D1 to D2. At the new price (£500) the quantity demanded is now higher, so the equilibrium moves to a final point (E″) where D2 meets S1.
In your answer draw both arrows and label them “movement along supply (price fall)” and “right‑ward shift of demand (higher income)”. Explain why the final equilibrium price is still £500 (price unchanged) but the equilibrium quantity is larger.
6. Exam Technique – Tackling Syllabus‑Based Questions
- Identify the trigger. Is the stimulus describing a price change (movement) or a non‑price factor (shift)?
- State the direction. E.g. “An increase in consumer income → right‑ward shift of the demand curve.”
- Explain the economic reasoning. Link the determinant to the shift, then to the new equilibrium (price and quantity).
- Draw a clear diagram.
- Label original curves (D1, S1) and new curves (D2 or S2).
- Show the movement arrow(s) and the shift arrow(s).
- Mark the old equilibrium (E1) and the new equilibrium (E2).
- If required, shade consumer and producer surplus and comment on any dead‑weight loss.
- Use correct terminology. Mention “ceteris paribus”, “short‑run/long‑run”, “elastic/inelastic”, and the relevant elasticity (PED, PES, YED, XED).
- Conclude succinctly. Summarise the impact on price, quantity, and welfare.
7. Quick Reference Checklist (Syllabus 2.1‑2.5)
- Determinants of demand – income (normal & inferior), population, tastes, expectations, related‑good prices, government consumer policies.
- Determinants of supply – input prices, price of related inputs, raw‑material availability, technology, expectations, taxes/subsidies, number of sellers.
- Elasticities – PED, PES, YED, XED; formulas, sign conventions, interpretation.
- Consumer surplus, producer surplus, dead‑weight loss – definitions, diagrammatic representation, simple numerical calculation.
- Equilibrium – definition, how movements vs. shifts create new equilibrium, short‑run vs. long‑run considerations.
- Ceteris paribus – always state when analysing a single factor.
Master these points and you will be well‑prepared for any demand‑and‑supply question in the Cambridge AS & A Level Economics examination.