A-Level Economics — Micro & Macro

Demand

• Law of demand: as price rises, quantity demanded falls (ceteris paribus); explained by diminishing marginal utility and the income/substitution effects.
• Movement along (price change) vs shift (a non-price factor). Demand shifters: income (normal/inferior goods), prices of substitutes and complements, tastes/advertising, population, expectations.

Supply

• Law of supply: as price rises, quantity supplied rises (profit motive). Supply shifters: costs of production, technology/productivity, taxes and subsidies, number of firms, weather/shocks.

Market equilibrium

• Where demand = supply (the market clears). Excess demand (shortage) pushes price up; excess supply (surplus) pushes it down.
• Consumer surplus (area below the demand curve, above price) and producer surplus (above supply, below price).

The price mechanism

• Rationing, incentive and signalling functions allocate resources.

Analysis skill

• Draw a labelled diagram, shift the correct curve, and explain the full chain of reasoning from the shift to the new equilibrium (with the effect on price and quantity).

A shift of a curve is caused by a non-price factor; a movement along is caused only by the good's own price.

Diagram