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# Price Mechanism | A-Level Economics Notes
- URL: https://www.a-level-economics-tutor.com/price-mechanism-notes/
- Published: 2026-01-19T15:33:37.000Z
- Updated: 2026-08-20T22:21:55.000Z
- Author: Jaisul Naik
- Tags: Y12 Microeconomics Notes

These revision notes cover everything you need to know about the **Price Mechanism** for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.

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### Increase in demand

1. The diagram below shows an increase in demand, which can be caused by factors like an increase in income.
2. At the old market price p1, there is an excess demand.
3. Firms notice this through market **signals** as they may see larger queues of customers waiting to be served,
4. Firms **respond** by raising prices.
5. The new market price p2 is higher so firms are **incentivised** to expand their supply to make higher profits, whilst consumers are **incentivised** to contract their demand.
6. The market clears at the new equilibrium quantity of q2 where excess demand has been **rationed**.

![](https://storage.ghost.io/c/c4/66/c466eade-2ad5-4613-8010-7a8ffa8c352f/content/images/2026/05/CleanShot-2026-05-12-at-20.02.10@2x.png)

### Decrease in demand

1. The diagram shows a decrease in demand.
2. At the old price p1, there is an excess supply.
3. This information is **signalled** to firms, for example they may empty shops.
4. Firms **respond** by decreasing prices.
5. This **incentivises** firms to consumers to expand demand and it **incentivises** firms to contract their supply due to lower profits.
6. Overall, the market clears at a new equilibrium at q2, where the excess supply is **rationed** away.

![](https://storage.ghost.io/c/c4/66/c466eade-2ad5-4613-8010-7a8ffa8c352f/content/images/2026/05/CleanShot-2026-05-12-at-20.07.52@2x.png)

### Decrease in supply

1. The diagram shows a decrease in supply.
2. At the old market price p1, there is an excess demand.
3. This information gets **signalled** to producers; they may see an increase in the number of customers waiting.
4. Firms **respond** by increasing prices.
5. A higher prices **incentivises** producers to expand their supply due to higher profit and it **incentivises** consumers to contract their demand.
6. Overall, the market clears at a new equilibrium at q2, where the excess demand is **rationed** away.

![](https://storage.ghost.io/c/c4/66/c466eade-2ad5-4613-8010-7a8ffa8c352f/content/images/2026/05/CleanShot-2026-05-12-at-20.12.38@2x.png)

### Increase in supply

1. The diagram shows an increase in supply.
2. At the old price p1, there is an excess supply.
3. This information is **signalled** to firms, for example they may empty shops.
4. Firms **respond** by decreasing prices.
5. This **incentivises** firms to consumers to expand demand and it **incentivises** firms to contract their supply due to lower profits.
6. Overall, the market clears at a new equilibrium at q2, where the excess supply is **rationed** away.

![](https://storage.ghost.io/c/c4/66/c466eade-2ad5-4613-8010-7a8ffa8c352f/content/images/2026/05/CleanShot-2026-05-12-at-20.13.00@2x.png)

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### Summary questions

1. How does the price mechanism respond to  
  1. an increase in demand
  2. a decrease in demand
  3. a decrease in supply
  4. an increase in supply

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