This topic builds one market model. Demand and supply meet at the equilibrium price. Elasticity then measures how strongly quantity responds to price and to…
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2.1
Demand, supply, equilibrium and elasticity
Pearson Edexcel International GCSE in Economics (4EC1), specification Issue 3,
February 2026. This topic covers spec sections 1.1.3–1.1.4 in full: demand,
supply and market equilibrium (10 lettered rows) and elasticity (19 rows).
The shared market model runs through the worked examples: demand $Q_d = 140 - 2P$, supply $Q_s = 20 + 4P$, equilibrium $P = 20$ and $Q = 100$.
Must-know for this topic:
Family
Relationship
equilibrium
$Q_d = Q_s$ (here P = 20, Q = 100)
excess
at P = 12: excess demand $= 116 - 68 = 48$; at P = 25: excess supply $= 120 - 90 = 30$
PED
$= \tfrac{\%\Delta Q_d}{\%\Delta P}$; TR test: price up and TR up → inelastic
Demand 需求 is the quantity consumers are willing AND able to buy at each
price over a period (1.1.3a). A change in the good's own price causes a
MOVEMENT ALONG the demand curve; a change in any other determinant SHIFTS
it — advertising, income, fashion and tastes, the price of SUBSTITUTES (a
rise shifts demand for this good right) and of COMPLEMENTS (a rise shifts
it left), and demographic changes (1.1.3b–c). Supply 供给 is the quantity
producers are willing AND able to sell at each price (1.1.3d); own-price
changes move ALONG the supply curve, while costs of production, technology,
indirect taxes, subsidies and natural factors (disasters, weather) SHIFT it
(1.1.3e–f).
Equilibrium 均衡 is where demand meets supply: $140 - 2P = 20 + 4P$ gives
$P^* = 20$ currency units and $Q^* = 100$ items/day (1.1.3g). Shift analysis
(1.1.3h): demand rising raises both equilibrium price and quantity; supply
rising raises quantity but lowers price; both shifting leaves one variable
indeterminate. EXCESS DEMAND at P = 12: $Q_d = 116$ against $Q_s = 68$, a
shortage of $48$; EXCESS SUPPLY at P = 25: $Q_s = 120$ against $Q_d = 90$,
a surplus of 30 (1.1.3i). Market forces remove both: shortage bids the
price UP, surplus pushes it DOWN, until the market returns to equilibrium
(1.1.3j).
Original model: the shortage at 12 and the surplus at 25 are computed in the text.
Price elasticity of demand 需求价格弹性 (PED, 1.1.4a–b): $PED =
\tfrac{\%\Delta Q_d}{\%\Delta P}$. Calculation: price rising from 20 to 22
moves $Q_d$ from 100 to 96, so $PED = \tfrac{-4\%}{+10\%} = -0.4$
(1.1.4c). The five interpretations (1.1.4e): 0 perfectly inelastic
(vertical), between 0 and −1 inelastic, −1 unitary, beyond −1 elastic,
infinite perfectly elastic (horizontal). PED depends on substitutes, the
degree of necessity, the percentage of income spent on the good, and time
(1.1.4f). The TOTAL REVENUE test (1.1.4g): TR $= P \times Q$; at P = 20, TR
$= 2000$; at P = 22, TR $= 2112$ — a price rise RAISING revenue proves
inelastic demand; on the shared curve TR peaks at 2450 where P = 35 (unitary
PED).
Price elasticity of supply 供给价格弹性 (PES, 1.1.4h–l): $PES =
\tfrac{\%\Delta Q_s}{\%\Delta P}$; on the shared model price 20 → 24 moves
$Q_s$ 100 → 116, so PES $= \tfrac{16\%}{20\%} = +0.8$ (inelastic supply).
PES depends on the factors of production (their mobility), availability of
stocks, spare capacity and time (1.1.4m). Examples (1.1.4n): manufactured
products tend to be MORE elastic (stocks, spare capacity, quick retooling);
primary products LESS elastic (growing periods, perishability, fixed land).
Income elasticity of demand 需求收入弹性 (YED, 1.1.4o–q): $YED =
\tfrac{\%\Delta Q_d}{\%\Delta \text{income}}$; income +10% raising quantity
+8% gives YED $= +0.8$. Interpretation (1.1.4r): YED $> 1$ LUXURY, a normal necessity has $0 < YED < 1$, YED $= 1$ means unit income elasticity,
and YED $< 0$ means INFERIOR. Significance (1.1.4s): PED guides
indirect taxes (inelastic goods raise reliable revenue) and subsidies; YED
guides firms' forecasts over the cycle — luxury sellers boom with incomes,
demand for inferior goods may rise as incomes fall, holding other influences constant.
Original model: elastic at the top of the demand curve, inelastic at the bottom; TR peaks where PED is unitary.
Explore
Price changes and revenue rectangles
Compare price times quantity before and after a change. State the percentage base when calculating finite-change PED.
price elasticity of demand/praɪs ɪlæˈstɪsɪti ɒv dɪˈmænd/
price elasticity of supply/praɪs ɪlæˈstɪsɪti ɒv səˈplaɪ/
income elasticity of demand/ˈɪŋkʌm ɪlæˈstɪsɪti ɒv dɪˈmænd/
2.1 2.2
Data-response practice
Extract. Most of the world's cocoa beans are grown in Côte d'Ivoire and Ghana. In 2023 and 2024 heavy rain, then drought and a plant disease destroyed much of the harvest there. In 2024 the world price of cocoa beans rose above $10,000 per tonne, about four times its price in early 2023. New cocoa trees take several years to produce beans, so farmers could not quickly grow more. Chocolate makers paid more for beans and raised the prices of their chocolate bars.
A chocolate maker raised the price of one bar from $1.00 to $1.20. Its weekly sales fell from 500,000 bars to 450,000 bars.
Questions
(a) Identify one factor that shifted the supply of cocoa beans in the extract. [1]
(b) Draw a demand and supply diagram to show the effect of the poor harvest on the market for cocoa beans. [4]
(c) Calculate the price elasticity of demand for the chocolate bars. [2]
(d) Calculate the change in the chocolate maker's weekly total revenue, and explain the result. [3]
(e) Explain two reasons why the supply of cocoa beans is price inelastic. [4]
(f) Evaluate whether the chocolate maker should raise the price of its bars again. [9]
A poor harvest shifts supply left: the price rises from $P_1$ to $P_2$ and the quantity falls from $Q_1$ to $Q_2$.
Model answers
(a) Bad weather (heavy rain or drought), or plant disease.
(b) The diagram shows demand $D$ and supply $S_1$ meeting at $P_1$, $Q_1$. The poor harvest shifts supply left to $S_2$. At the old price there is now excess demand, so the price rises to $P_2$ and the quantity bought and sold falls to $Q_2$. Marks: labelled axes, both supply curves, the arrow showing the shift, and the new price and quantity.
(c) $\%\Delta Q_d = \tfrac{450{,}000 - 500{,}000}{500{,}000} \times 100 = -10\%$ and $\%\Delta P = \tfrac{1.20 - 1.00}{1.00} \times 100 = +20\%$, so $PED = \tfrac{-10}{20} = -0.5$. Demand is price inelastic.
(d) Total revenue before $= 500{,}000 \times 1.00 = \$500{,}000$; after $= 450{,}000 \times 1.20 = \$540{,}000$. Revenue rose by $40,000 a week. Demand is price inelastic ($PED = -0.5$): the percentage fall in sales (10%) is smaller than the percentage rise in price (20%), so the higher price brings in more money.
(e) First, new cocoa trees take several years to produce beans, so farmers cannot quickly grow more when the price rises: supply responds slowly. Second, cocoa needs particular land and climate, so production cannot easily move to other places. (Other good answers: beans cannot be stored for long, and farmers have little spare capacity.)
(f) For a further rise: demand is price inelastic ($PED = -0.5$), so a higher price raises revenue, as part (d) shows. The firm's costs are rising because beans are much dearer, and a higher price protects its profit. Many rival makers face the same costs, so they are likely to raise prices too, and customers may not switch.
Against a further rise: PED is measured over one small price change and may not stay the same. At a higher price buyers may switch to other snacks or to cheaper own-brand chocolate, so demand could become more elastic. If incomes are falling, some buyers may stop buying chocolate. A firm that raises prices more than its rivals may lose customers for the long term. The firm could instead make the bar slightly smaller or use less cocoa, which keeps the price the same.
Judgement: a small further rise is likely to raise revenue in the short run, because demand is inelastic and costs are high. But the firm should watch its rivals' prices and its weekly sales, because demand may become more elastic as the price climbs. If cocoa prices fall when harvests recover, it may be better to keep the price stable than to lose loyal customers.
What examiners reward: a correctly labelled diagram, working shown for each calculation, and in the "evaluate" answer points on both sides that use the extract's numbers, ending with a judgement.
2.1 2.2
Checklist
Demand and supply definitions; movements versus shifts with the five demand and five supply determinants (1.1.3a–f).
Equilibrium from $Q_d = Q_s$; shift analysis; excess demand 48 at P = 12 and excess supply 30 at P = 25; market-force adjustment (1.1.3g–j).
PED definition, formula, calculation (−0.4), the five value ranges, four influence factors, the TR test (2000 → 2112 → 2450) (1.1.4a–g).
PES definition, formula, calculation (+0.8), five ranges, four factors, manufactured vs primary (1.1.4h–n).
YED definition, formula, calculation (+0.8), luxury/normal/inferior thresholds; significance for business and government (1.1.4o–s).
Boundary notes: Paper 1 (microeconomics, 80 marks) mixes MCQ, short answer,
data response and open questions; calculators allowed. Use precise definitions; diagram marks need labelled axes, curves, equilibria and the
shift arrow. All worked numbers are original on the shared model.
A market price links buyers and sellers. At equilibrium, quantity demanded equals quantity supplied. A lower price can create excess demand; explain the pressure on price without assuming immediate adjustment. Distinguish a movement along a curve from a change in another determinant.
Worked case
In an original market table, at price 15 buyers demand 110 items/day and sellers offer 80; at price 20 both quantities are 100; at price 25 they are 90 and 120. Identify equilibrium and explain price pressure at 15. Prices are currency units per item.
The matching quantities identify equilibrium at price 20 currency units/item and quantity 100 items/day. At price 15 the shortage is 110 − 80 = 30 items/day. Buyers competing for scarce stock or sellers revising prices may push the price up. As price changes, quantities move along unchanged curves. An income or cost change can instead shift a curve; actual adjustment depends on market conditions.
Independent transfer
A publicity campaign raises demand while a supplier's input costs increase. Explain why equilibrium quantity cannot be predicted from these directions alone and describe the diagram.
Checked original model
Demand shifts right and supply shifts left on axes of price and quantity. Both changes tend to raise equilibrium price, but their quantity effects oppose one another. Draw both new curves and compare relative shifts before judging quantity. Identify the unchanged determinants and time horizon. A large demand increase can outweigh the supply contraction; a large contraction can reverse that result. Do not confuse a movement caused by the new equilibrium price with a second demand shift.
Elasticity, welfare and policy
Percentage changes need a stated convention. PED uses quantity demanded and own price on the same demand relation; PES uses quantity supplied. YED and cross-price elasticity compare different determinants. A unit tax creates a price wedge; relative responsiveness shapes burden. An externality concerns third-party costs/benefits, not merely an expensive transaction. Public goods and information failure have different mechanisms.
Worked case
An original market's pre-tax price is 10. After a unit tax, consumers pay 12 and producers receive 9. Calculate the wedge and burden, then qualify a welfare claim.
Tax per item=consumer price−producer receipt=12−9=3 currency units/item. Consumer burden=12−10=2 units/item; producer burden=10−9=1 unit/item. The stated burden split concerns this equilibrium, not a universal tax rule. Tax revenue=tax per item×post-tax quantity; that quantity must be known. Revenue is a transfer, while welfare effects require changes in surplus, resource use and any external harm. A corrective tax can reduce inefficient overproduction, but only with the relevant external-cost model and evidence. Collection cost, evasion and access matter.
Independent transfer
A subsidy expands a product with an unpriced external cost. Is greater output necessarily a welfare gain? Compare a better-targeted policy.
Checked original model
Greater output can increase external harm even if consumers and producers gain privately. Identify marginal social/private costs and the efficient versus market quantity before judging. A targeted charge or standard may address the harm more directly, subject to measurement, enforcement and distribution. A subsidy for a cleaner alternative might help through a different mechanism; its fiscal and behavioural effects still need evaluation. IGCSE pupils use the supported private/external/social distinction; detailed marginal welfare geometry belongs only where the course's mapped outcomes authorize it.
Evidence and assessment limits
The tasks and marking points here are original, not official questions or mark schemes. The exam format follows the Issue 3 specification and the June 2025 4EC1/01 and 4EC1/02 papers and mark schemes: two 90-minute 80-mark papers, each four compulsory 20-mark questions mixing 1-mark multiple choice, 1–2-mark define/state/calculate, 6-mark analyse, 9-mark assess and 12-mark evaluate items that require reference to the supplied data; extended answers are level-marked (6-mark: 1–2/3–4/5–6; 12-mark: 1–4/5–8/9–12 with an AO4 judgement at the top). Assessment objectives weigh AO2 application at about half of the qualification.
Interactive lessons on this topic
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