Pearson Edexcel · A-Level · Economics B
Course version: 9EB0 · Version from Sept 2015
Price mechanism: b) How firms respond to a change in demand
Firms must respond effectively to changes in demand to maximise profits and maintain market share.
Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .
- Point 2 of 4
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Firms must respond effectively to changes in demand to maximise profits and maintain market share. When demand for a product increases, perhaps due to a successful marketing campaign or changing consumer tastes, firms typically respond in the short term by raising prices to capitalise on the shortage, which increases profit margins. They may also increase capacity utilisation by asking existing staff to work overtime. In the long term, firms respond to sustained high demand by investing in new capital, hiring more workers, and expanding production facilities. Conversely, if demand falls, firms might lower prices to clear excess inventory or reduce output.
What earns the marks
- Identify short-term responses to increased demand, such as raising prices or increasing the utilisation of existing resources.
- Explain long-term responses to sustained demand increases, including capital investment and expanding the workforce.
- Describe how firms respond to a decrease in demand by lowering prices, reducing output, or cutting costs.
- Analyse the role of the profit motive in driving a firm's response to changing market conditions.
Common mistakes and how to put them right
Assuming firms can instantly increase supply in response to higher demand.
Put it right: Recognise that supply is often inelastic in the short run, so the immediate response is usually a price increase rather than a significant output increase.
Ignoring the difference between short-term and long-term responses.
Put it right: Clearly distinguish between immediate actions, such as offering overtime, and long-term strategic decisions, such as building a new factory.
Focusing only on increases in demand.
Put it right: Ensure you also understand and can explain how firms respond to a decrease in demand, such as by discounting stock or reducing capacity.
Exam tips
- Use the concepts of price elasticity of supply to evaluate how quickly and effectively a firm can respond to a change in demand.
- When discussing a firm's response, consider the impact on its factors of production, such as the need to hire more labour or invest in capital.
- Apply real-world examples of businesses adapting to changing consumer trends to strengthen your analysis of firm behaviour.
Try the lesson
The start of the Price mechanism: b) How firms respond to a change in demand lesson, made from checked teaching notes for this specification point.
Have a go first
If a firm experiences a sustained and significant increase in consumer demand for its product, which of the following is the most likely long-term response?
Listen
Firms must respond effectively to changes in demand to maximise profits and maintain market share. When demand for a product increases, perhaps due to a successful marketing campaign or changing consumer tastes, firms typically respond in the short term by raising prices to capitalise on the shortage, which increases profit margins. They may also increase capacity utilisation by asking existing staff to work overtime. In the long term, firms respond to sustained high demand by investing in new capital, hiring more workers, and expanding production facilities. Conversely, if demand falls, firms might lower prices to clear excess inventory or reduce output. A strong answer earns marks for these points. Identify short-term responses to increased demand, such as raising prices or increasing the utilisation of existing resources. Explain long-term responses to sustained demand increases, including capital investment and expanding the workforce. Describe how firms respond to a decrease in demand by lowering prices, reducing output, or cutting costs. Analyse the role of the profit motive in driving a firm's response to changing market conditions. A common slip: Assuming firms can instantly increase supply in response to higher demand. Instead, Recognise that supply is often inelastic in the short run, so the immediate response is usually a price increase rather than a significant output increase. Exam tip: Use the concepts of price elasticity of supply to evaluate how quickly and effectively a firm can respond to a change in demand.
See it
Key words
Say what each word means before you turn the card.
Profit maximisation
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Supply elasticity
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Market dynamics
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Capacity utilisation
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See every definition
- Profit maximisation
- The goal that drives firms to respond effectively to changes in demand so that they can maximise profits.
- Supply elasticity
- A concept used to evaluate how quickly and effectively a firm can respond to a change in demand; supply is often inelastic in the short run.
- Market dynamics
- Changing market conditions, such as a change in demand, to which firms must respond to maintain market share.
- Capacity utilisation
- Increasing this by asking existing staff to work overtime is a short-term response to increased demand.
Label the diagram
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1Box 1
2Box 2
3Box 3
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