A LevelBusinessEdexcelRevision Notes1. Marketing and People1.2 Market1.2.3 Markets

Markets (Edexcel A Level Business)

Revision Note

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Mark Collins

The Interaction of Supply & Demand

  • In a market, prices for goods/services are determined by the interaction of demand & supply 
  • A market is any place that brings buyers & sellers together to trade at an agreed price
    • Markets can be physical (e.g. McDonald's) or virtual (e.g. eBay)
    • Buyers agree on the price by purchasing the good/service
    • If they do not agree on the price then they do not purchase the good/service
       
  • Based on this interaction with buyers, sellers will gradually adjust their prices until there is an equilibrium price and quantity that works for both parties
    • At the equilibrium price, sellers will be satisfied with the rate/quantity of sales
    • At the equilibrium price, buyers are satisfied that the product provides benefits worth paying for

-1-2-3-the-interaction-of-supply-and-demand

A graph showing a market in equilibrium with a market clearing price at P & quantity at Q

Diagram Analysis

  • If the price is set at £20, demand will equal supply and equilibrium is reached
    • 600 units will be demanded and supplied
    • If the price was set above equilibrium, supply would be greater than demand and there would be a surplus
    • If the price was set below equilibrium demand would be greater than supply and there would be a shortage

Dynamic Changes in Markets

  • There are 4 diagrams that can be used to show the causes and consequences of changes to the non-price factors of demand and supply 
     

The Impact of Changes to the Non-price Factors of Demand and Supply


Cause
Diagram
Explanation

A rise in demand

1-2-6-increase-in-demand_edexcel-al-economics

  • The original equilibrium was at P1 and Q1
  • A rise in demand causes the demand curve to shift to the right from D1→ D2 (perhaps due to an increase in home working)
  • At the original price of P1, there is now a shortage as demand exceeds the supply
  • The shortage causes prices to rise from P1 to P2
  • A new equilibrium develops at a price of P2 and a quantity of Q2 units
  • The business revenue (P x Q) has changed from P1Q1 to P2Q2

A fall in demand

1-2-6-decrease-in-demand_edexcel-al-economics

  • The original equilibrium was at P1 and Q1
  • A fall in demand causes the demand curve to shift to the left from D1→ D2 (perhaps due to an external shock)
  • At the original price ofP1, there is now a surplus as supply exceeds demand
  • The surplus causes prices to fall from  P1 to P2
  • A new equilibrium develops at a price of P2 and a quantity of Q2 units
  • The business revenue (P x Q) has changed from P1Q1 to P2Q2

A rise in supply

1-2-6-increase-in-supply_edexcel-al-economics

  • The original equilibrium was at P1 and Q1
  • A rise in supply causes the supply curve to shift to the right from S1→ S2 (perhaps due to an increase in productivity)
  • At the original price of P1, there is now a surplus as supply exceeds demand
  • The surplus causes prices to fall from  P1 to P2
  • A new equilibrium develops at a price of P2 and a quantity of Q2 units
  • The business revenue (P x Q) has changed from P1Q1 to P2Q2

A fall in supply

2-6-1-changing-market-conditions-

  • The original equilibrium was at P1 and Q1
  • A fall in supply causes the supply curve to shift to the left from S1→ S2 (perhaps due to an increase in the costs of production)
  • At the original price of P1, there is now a shortage as demand exceeds the supply
  • The shortage causes prices to rise from P1 to P2
  • A new equilibrium develops at a price of P2 and a quantity of Q2 units
  • The business revenue (P x Q) has changed from P1Q1 to P2Q2

Exam Tip

When answering questions on changes to markets, remember that a change in the price of the good leads to a movement along the demand or supply curve, not a shift in the demand or supply curve.

Practice drawing and labelling demand and supply diagrams accurately, describing them step-by-step, this will help you gain analysis marks.  You can also use demand and supply diagrams to illustrate changes in total revenue.

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    Mark Collins

    Author: Mark Collins

    Mark has taught Business and Economics for over 25 years in the UK, Sri Lanka and Thailand. He has an MA from UCL and was a research assistant at the Institute of Education. He enjoys creating learning resources for students and has co-authored several teaching guides. Mark has been an examiner and principal examiner for various exam boards and has a mission to demystify the examination process for students. When not teaching Mark plays guitar, harmonica, ukulele and is currently teaching himself piano. He is a firm believer in Lifelong Learning.