Edexcel IGCSE Economics (4EC1) · Section A: The Market System
Specification points
- The role of markets and the price mechanism.
- Demand and supply, and the factors that shift them.
- Market equilibrium and the effects of price changes.
Markets and the price mechanism
A market brings buyers and sellers together. Prices allocate resources by signalling scarcity, giving producers an incentive, and rationing scarce goods.
Demand and supply
- Demand slopes down (law of demand); own price → movement along; non-price factors (income, related goods, tastes, population) → shift.
- Supply slopes up; costs, technology, taxes/subsidies and the number of firms → shift.
Key definitions
| Term | Definition |
|---|---|
| Equilibrium | The price where quantity demanded equals quantity supplied. |
| Excess demand | A shortage at prices below equilibrium. |
| Excess supply | A surplus at prices above equilibrium. |
Market equilibrium
Equilibrium is where demand meets supply. Above it, a surplus pushes price down; below it, a shortage pushes price up. When demand or supply shifts, price and quantity adjust to a new equilibrium.
| Change | Price | Quantity |
|---|---|---|
| Demand rises | Up | Up |
| Supply rises | Down | Up |
Worked example
A hot summer raises demand for ice cream (demand shifts right). At the old price a shortage appears; price rises and quantity traded rises to the new equilibrium. Sellers gain, and the higher price rations the limited supply to buyers willing to pay.
Common exam mistakes
- Confusing a movement along with a shift.
- Confusing excess demand (shortage) with excess supply (surplus).
- Forgetting to relabel the new equilibrium.
Exam technique
Draw and label demand and supply, identify the shift and its cause, then state the new price and quantity.
Quick revision
- Price mechanism: signal, incentive, ration.
- Own price → movement; other factors → shift.
- Equilibrium = where D meets S; surplus → price down, shortage → price up.