Syllabus: Pearson - AS Level Economics
Module: 1.2 How Markets Work
Lesson: 1.2.6 Price Determination

Introduction

This article supports the Pearson Edexcel AS Level Economics A specification, focusing on section 1.2.6: Price Determination, within Theme 1: Introduction to Markets and Market Failure.

Price determination is a cornerstone of microeconomics, laying the foundation for understanding how market forces interact to allocate resources. It helps students make sense of the everyday economic phenomena they hear about in the news, see in shops, or experience online. It’s also essential for more advanced analysis later in the course.

Key Concepts

According to the Pearson syllabus, students must grasp the following:

• Equilibrium price and quantity: How the interaction of demand and supply determines the market-clearing price and the quantity traded.

• Supply and demand diagrams: Use these to show how shifts in demand and/or supply affect the equilibrium.

• Excess supply and excess demand: How surpluses and shortages emerge and how prices adjust to restore balance.

• Market forces: The self-regulating nature of markets and how they respond to changes in conditions, reallocating resources without the need for central planning.

Students should also understand how to apply these models to real-world data and scenarios, using diagrams clearly and accurately.

Real-World Relevance

You don’t have to look far to find examples of price determination in action. Consider the sharp increases in the cost of eggs or tomatoes during supply chain disruptions. Or the housing market, where changes in demand (like post-lockdown relocations) and supply constraints (labour shortages in construction) pushed up prices.

A mini case study: In 2023, the used car market in the UK saw a spike in prices due to supply shortages of new vehicles. Demand remained high while supply was restricted — a textbook case of excess demand pushing the equilibrium price higher.

Encouraging students to bring in examples like these — from food prices to streaming service subscriptions — makes the content immediately relevant and much easier to grasp.

How It’s Assessed

This topic can appear in Section A or B of the AS Paper 1 assessment. Students may be expected to:

• Interpret supply and demand diagrams with clear annotations.

• Calculate equilibrium price and quantity using data.

• Analyse scenarios where demand or supply shifts and explain the resulting market outcomes.

• Use key command words:

  • Explain (show understanding and use economic terminology).

  • Analyse (make logical chains of reasoning, often with diagram support).

  • Evaluate (discuss alternative outcomes or limitations of the model).

Assessment typically involves short-answer data response questions or longer 10- and 12-mark essay-style tasks that require extended written analysis.

Enterprise Skills Integration

Price determination naturally supports enterprise thinking:

• Problem-solving: Students must predict how markets respond to shocks — from policy changes to external disruptions.

• Decision-making: Analysing whether a firm should raise prices or enter a market based on demand conditions.

• Quantitative reasoning: Applying formulas and interpreting graphs to support conclusions.

You can introduce mini tasks like “You’re a producer of eco-friendly trainers. How would a change in raw material costs affect your pricing strategy?” to engage students in active, applied learning.

Careers Links

This topic links well with Gatsby Benchmarks 4 and 5. Understanding price mechanisms is vital in roles such as:

• Market analysts

• Policy advisors

• Business development managers

• Procurement officers

It also supports broader career awareness in fields like real estate, retail, and transport logistics — all sectors where supply and demand visibly influence pricing.

For added relevance, invite a local business owner to explain how they set prices or respond to cost changes.

Teaching Notes

Top Tips:

• Start with a real-life product and build the diagram from there.

• Revisit the basics of drawing and labelling supply and demand curves. Mislabelled diagrams cost students easy marks.

• Use interactive activities like price auctions or supply shock simulations to reinforce learning.

• Mix in topical news clips or product price comparisons to keep things fresh.

Common Pitfalls:

• Students often confuse movements along the curve with shifts of the curve. A simple visual demo can clear this up.

• Some learners try to memorise diagrams rather than understanding what they show. Push for explanation over replication.

Extension Ideas:

• Introduce dynamic scenarios where both curves shift, prompting more advanced analysis.

• Ask students to evaluate the limitations of the model in the context of digital markets or price setting in monopolies.