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

Introduction

Price determination sits at the heart of A Level Economics and marks a turning point in how students think about real markets. According to the Pearson Edexcel A Level Economics A Specification (Theme 1, Section 1.2.6), students are expected to understand how prices are determined through the interaction of supply and demand, and how shifts in either curve affect market equilibrium.

This topic forms part of the foundational microeconomic content that feeds directly into assessment in Paper 1 and supports understanding across the wider qualification. It’s not just a theory – this section develops the analytical toolkit students need to make sense of everything from housing prices to supermarket promotions.

Key Concepts

Pearson’s specification outlines the following as core knowledge for 1.2.6 Price Determination:

• Equilibrium price and quantity: How they are set through the interaction of supply and demand.

• Market forces: How excess demand (shortage) or excess supply (surplus) are resolved through price changes.

• Shifts in demand and supply: How real-world changes – such as income shocks or supply chain disruptions – shift the curves.

• Use of diagrams: Students must be able to draw and interpret supply and demand diagrams, including when they shift and how equilibrium changes.

Students also need to apply these models critically, understanding that real markets don’t always behave neatly. This builds towards Theme 1’s emphasis on rational decision-making, elasticity, and the price mechanism.

Real-World Relevance

This topic becomes instantly real when students apply it to what they see around them. Take for example:

• Rental housing markets in UK cities: A surge in demand (due to returning students or remote workers relocating) can outpace supply, pushing rents higher – a classic shift in demand.

• Energy prices: The war in Ukraine triggered a supply shock, which shifted the supply curve left, raising prices and exposing students to how markets react to global instability.

• Concert tickets and limited-edition trainers: When supply is fixed but demand spikes, we get excess demand and price escalation – especially in secondary markets.

Encourage students to bring examples from the news or their own experiences into class discussions – it makes abstract curves more concrete.

How It’s Assessed

In Pearson’s A Level exams, students are assessed on their ability to apply, analyse and evaluate using supply and demand diagrams. Expect to see:

• Diagram-based questions: “Draw and explain how the equilibrium price would be affected by a rise in consumer incomes.”

• Data response: Students interpret scenarios using supply and demand logic.

• Essay questions: “Discuss the extent to which changes in consumer preferences might affect market prices.”

Key command words include “explain”, “analyse”, “evaluate” and “calculate”. Clarity and precision with diagrams, labelling and written reasoning are essential.

Enterprise Skills Integration

This topic builds directly into real-world thinking and enterprise skills, especially:

• Problem-solving: Understanding how businesses respond to price changes, shortages, or surpluses.

• Decision-making: Analysing how supply and demand insights guide pricing, investment, or stock decisions.

• Critical thinking: Recognising the limitations of models and applying judgement to real scenarios.

These skills echo what students would do in a business context – from deciding how much to produce to reacting to market signals.

Careers Links

Price determination is not just for economists. It underpins decision-making in careers like:

• Marketing and pricing analysts: Who study how pricing affects consumer behaviour.

• Business operations roles: Where demand forecasting and stock planning are key.

• Policy advisors and civil servants: Especially in departments like the Treasury, where understanding supply shocks can guide policy.

• Financial services and investment: Interpreting market trends depends on knowing how price reacts to new information.

This lesson aligns with Gatsby Benchmark 4 (Linking curriculum learning to careers) and Benchmark 5 (Encounters with employers and employees) when paired with guest speakers or case study analysis.

Teaching Notes

Tips for delivery:

• Start with lived examples – e.g. “Why did Prime Energy drinks sell out?” – before introducing curves.

• Use dual-axis graphs interactively: one student moves demand, another adjusts supply, others predict price outcomes.

• Anchor every new curve with a question: “What real-world change could cause this?”

Common pitfalls:

• Students often confuse movement along a curve with a shift of the curve.

• Diagrams are sometimes poorly labelled – clarity matters.

• Misinterpreting excess demand or excess supply as permanent states rather than transitional ones.

Extension activities:

• Simulate a marketplace using playing cards or tokens to model price changes in real time.

• Analyse a current article (e.g. used car market, egg shortages) and annotate with supply/demand shifts.

• Investigate government intervention (linking to next topic on market failure) where price mechanisms struggle to clear the market.