HookThe year second-hand cars cost more than new ones
In 2021 a global shortage of semiconductor chips — a modern car contains hundreds — throttled new-car production. UK new car registrations, about 2.3 million in 2019, fell to roughly 1.65 million in 2021. Buyers who couldn't get a new car turned to the used forecourt, and demand slammed into a supply that was also shrinking (fewer new sales means fewer part-exchanges arriving). Auto Trader's price index showed used-car prices rising around 30% through 2021–22, and dealers reported the near-unthinkable: some one-year-old cars selling for more than the list price of the same model new — because the new one carried a nine-month waiting list.
No committee decided any of that. Prices moved because demand shifted right while supply shifted left, and the market cleared where the two crossed. Section 1.2 asks you to hold the whole machine in your head: what shifts demand, what shifts supply, how their interaction sets the price — and then the two elasticities that measure how violently quantity responds when price or income moves.
ModelDemand — six shifters and one movement
Demand is the quantity customers are willing and able to buy at each price. A change in the product's own price causes a movement along the demand curve — nothing else does. Everything else shifts the whole curve: changes in real incomes; the prices of substitutes (when Netflix raised UK prices in 2022, Disney+ became relatively cheaper) and complements (dearer electricity dents demand for electric showers); fashion and tastes (oat milk's rise pulled dairy demand left); advertising and branding; demographics (an ageing population lifts demand for stairlifts and cruises); and seasonal or external shocks.
Edexcel's favourite trap is the substitutes/complements pairing. Substitutes compete — a price rise for one raises demand for the other. Complements are consumed together — a price rise for one cuts demand for the other. Get the direction wrong and a 4-marker dies in its first line, so rehearse the logic until it is reflexive: printers and ink move together; butter and margarine move apart.
ModelSupply — costs, technology, taxes and shocks
Supply is what producers are willing and able to sell at each price, and its shifters are mostly about the cost of producing: input costs (when wholesale gas prices multiplied in 2022, everything from bread to bricks got dearer to make), wages, indirect taxes (shift supply left) and subsidies (right), technology (cuts unit costs, shifts supply right), and natural shocks. The 2022–23 avian flu outbreak was a textbook supply shock: millions of birds culled, free-range eggs off the shelves as flocks were ordered indoors, and by November 2022 Asda and Lidl were rationing how many boxes shoppers could buy. Egg prices rose by roughly a third year on year.
Note what did NOT happen: shoppers didn't suddenly want eggs more or less. Demand sat still; supply lurched left; price did the adjusting. Being able to say which curve moved — and to quote the evidence that proves it — is the entire skill this leaf examines.
MechanismEquilibrium — how the market clears itself
Equilibrium is the price at which quantity demanded equals quantity supplied. Above it there is excess supply: unsold stock piles up and sellers cut price. Below it there is excess demand: queues, waiting lists and resale premiums — the used-car market of 2021 in one line — and the price gets bid up. This is the price mechanism: no planner, just incentives doing the rationing and signalling automatically.
Run the used-car story through the diagram. Demand shifts right (buyers displaced from the new-car market). Supply shifts left (fewer part-exchanges arriving). Both movements push price the same way — up — which is why the rise was so violent, around 30% in a year. Quantity, by contrast, is ambiguous when the curves move in opposite directions: one shift raises it, the other lowers it. 'Price unambiguously up, quantity uncertain' is a phrase worth memorising for exactly this exam question.
ModelPED — how hard a price change bites
Price elasticity of demand = percentage change in quantity demanded ÷ percentage change in price. The answer is negative (price up, quantity down); what matters is the size. Below 1 in absolute terms is inelastic — necessities, strong brands, no close substitutes, small share of income. Above 1 is elastic — plenty of rivals, easily postponed, big-ticket. The determinants Edexcel credits: availability of substitutes, brand loyalty, degree of necessity or habit, proportion of income spent on the good, and time to adjust — demand is almost always more elastic in the long run.
The pay-off is the total revenue rule. Inelastic demand: a price rise LIFTS revenue, because the volume loss is proportionally smaller than the price gain. Elastic demand: a price rise destroys revenue. This is why a strong brand like Apple can nudge prices up almost annually, while airlines in the easyJet–Ryanair knife-fight compete pennies at a time.
A bakery sells sourdough loaves at £2.00 and shifts 500 a week. It raises the price to £2.20 — a 10% rise — and sales slip to 460, an 8% fall. PED = −8% ÷ +10% = −0.8: inelastic. Revenue before: £2.00 × 500 = £1,000. After: £2.20 × 460 = £1,012. Revenue rose £12 despite selling 40 fewer loaves — the inelastic outcome. If PED had been −1.5 instead, sales would have fallen 15% to 425 and revenue to £2.20 × 425 = £935. State the formula, substitute, interpret, then run the revenue check: that sequence is the full 4 marks.
ModelYED — what income growth (or a squeeze) does to you
Income elasticity of demand = percentage change in quantity demanded ÷ percentage change in real income. Positive YED = normal good; above +1 is a luxury, between 0 and +1 a necessity. Negative YED = inferior good — demand RISES as incomes fall, because customers trade down. The 2022–23 cost-of-living squeeze ran the experiment live: Kantar reported supermarket own-label lines taking over half of grocery spending as branded goods were traded away, while discounters B&M and Home Bargains kept opening stores as mid-market retail shrank.
For firms, YED is a forecasting tool: know your product's YED and a Bank of England income forecast becomes a demand forecast. It also explains portfolio strategy — Associated British Foods owns both Primark, which trades brilliantly in a squeeze, and a stable of grocery brands, smoothing the group's ride through the cycle.
Real incomes rise 4%. A recipe-box firm with YED = +2.0 expects demand up by 4% × 2.0 = 8%. A value instant-noodle brand with YED = −0.5 expects demand DOWN by 4% × 0.5 = 2% — its customers are trading back up. Reverse the economy (incomes fall 4%) and the signs flip: noodles +2%, recipe boxes −8%. Two one-line calculations, opposite fortunes — and the reason 'which firm is more recession-resistant?' is secretly a YED question.
VocabularyKey terms the mark scheme pays for
TrapsMisconceptions that cost marks
ExamWhat examiners want
Every calculation answer should run formula → substitution → answer with units → one-sentence interpretation. Edexcel mark schemes reserve the final mark for the interpretation, and it is the mark most commonly dropped. On supply-and-demand questions, name the curve that shifted and quote the evidence from the extract that proves it — 'feed costs rose, so supply shifted left' beats a paragraph of generic theory.
For elasticity 8- and 12-markers, the reliable evaluation lines are: elasticity values are estimates that age quickly; PED changes over time as customers find substitutes; and a strong brand can deliberately LOWER its own PED through differentiation — which turns elasticity from a given into a strategy. Linking 1.2.4 forward to pricing strategy in 1.3.3 that way is exactly the synoptic move Paper 3 rewards.