Economics 9708 · syllabus 7
Cambridge A Level Economics 9708 — The price system and the microeconomy (A Level) topical past papers
Consumer choice, efficiency and market failure, externalities and cost–benefit analysis, costs and revenues, market structures, and how firms grow and set prices.
- Questions
- 1,454
- Years
- 2002–2026
- With mark scheme
- 100%
- Questions 2022–2026
- 430
Anyone can browse these pages. Opening the questions and their mark schemes takes a free Momentum account.
What The price system and the microeconomy (A Level) covers
The A Level course explains demand from the consumer's side. Marginal utility, the satisfaction from one more unit, diminishes as consumption rises, and a consumer gets the most from a budget by spending so that the marginal utility per dollar is the same for every good; when one good's price falls, buying more of it restores that balance, which gives a downward-sloping demand curve. Indifference curves and budget lines show the same choice on a diagram: the best affordable point is where the budget line just touches the highest indifference curve, and a price change can be split into a substitution effect and an income effect, which is how normal, inferior and Giffen goods are told apart.
Efficiency has several meanings: productive efficiency is producing at the lowest possible average cost; allocative efficiency is producing where price equals marginal cost; dynamic efficiency is improvement over time through investment and innovation; and Pareto optimality is reached when no one can be made better off without making someone worse off. Markets fail for several reasons, among them externalities, costs or benefits that fall on third parties. With a negative production externality, marginal social cost lies above marginal private cost, so the market produces more than the social optimum, where marginal social cost equals marginal social benefit, and there is a deadweight welfare loss. Cost–benefit analysis puts money values on all the private and external costs and benefits of a project, unpriced ones included, to judge whether it should go ahead.
The rest of the topic is the theory of the firm. In the short run, with at least one factor fixed, diminishing returns eventually push up marginal and average costs; in the long run, economies and diseconomies of scale shape the long-run average cost curve. Profit is maximised where marginal cost equals marginal revenue, with normal profit counted as a cost. Market structures run from perfect competition, where firms are price takers and earn only normal profit in the long run, through monopolistic competition and oligopoly to monopoly, which can keep supernormal profit behind barriers to entry. Contestable markets, growth by integration, the survival of small firms, firms' differing objectives and the ways they set prices, such as price discrimination, complete the topic. This is A Level content, examined on Papers 3 and 4.
In the syllabus
The headings this topic has in the Cambridge International 2026–2028 syllabus, as the board prints them.
- 7 The price system and the microeconomy (A Level)
- 7.1 Utility
- 7.2 Indifference curves and budget lines
- 7.3 Efficiency and market failure
- 7.4 Private costs and benefits, externalities and social costs and benefits
- 7.5 Types of cost, revenue and profit, short-run and long-run production
- 7.6 Different market structures
- 7.7 Growth and survival of firms
- 7.8 Differing objectives and policies of firms
What you should be able to do
- Use marginal utility and the equi-marginal principle to explain consumer choice and the downward slope of demand
- Draw budget lines and indifference curves, and separate the income and substitution effects of a price change for normal, inferior and Giffen goods
- Define productive, allocative and dynamic efficiency and Pareto optimality, and explain the causes of market failure
- Draw externality diagrams with private and social cost and benefit curves, identify the welfare loss, and explain the stages and limits of cost–benefit analysis
- Explain short-run and long-run costs, diminishing returns, and economies and diseconomies of scale
- Compare perfect competition, monopolistic competition, oligopoly and monopoly for price, output, profit and efficiency, and explain contestable markets
- Explain how firms grow, why small firms survive, and how firms with different objectives choose output and prices, including by price discrimination
Key ideas
- Equi-marginal principle: utility is maximised when MUa ÷ Pa = MUb ÷ Pb for every pair of goods
- When a price falls, the substitution effect always raises quantity demanded; the income effect adds to it for a normal good, works against it for an inferior good, and outweighs it for a Giffen good, whose quantity demanded falls
- Social cost = private cost + external cost; social benefit = private benefit + external benefit; the social optimum is where MSC = MSB
- Allocative efficiency: P = MC; productive efficiency: output at the lowest point of average cost
- Profit maximisation: MC = MR, with MC rising; revenue maximisation: MR = 0
- Normal profit is the minimum return that keeps the entrepreneur in the industry and is counted as a cost; supernormal profit is anything above it
- Price discrimination needs market power, separable markets with different price elasticities of demand, and no resale between them
How The price system and the microeconomy (A Level) has been examined
From 2022 to 2026, The price system and the microeconomy (A Level) was on Paper 4 · A Level Data Response and Essays in 14 of 14 exam series, worth about 33% of that paper’s marks.
| Paper | Questions | Share of marks | Series |
|---|---|---|---|
| Paper 3 · A Level Multiple Choice | 367 | 35% | 14 of 14 |
| Paper 4 · A Level Data Response and Essays | 63 | 33% | 14 of 14 |
Momentum’s own count, over the questions in its bank for these years: a series is one exam session, every zone included, and a question filed under two chapters counts in both. Median marks per question: 1. The bank files this topic together with neighbouring ones, so these figures count every question in its chapters, including some on those topics.
Filed in Momentum under: The Price System and the Micro Economy, Basic Economic Ideas and Resource Allocation.
A worked example
A firm can sell 1, 2, 3, 4 or 5 units a day at prices of $22, $20, $18, $16 and $14. Its total cost, normal profit included, is $10 at zero output and $18, $24, $32, $44 and $60 at outputs of 1 to 5 units. Find the profit-maximising output and price, and the firm's profit.
- Total revenue (price × output): $22, $40, $54, $64 and $70
- Marginal revenue: $22, $18, $14, $10 and $6; marginal cost, starting from $10 at zero output: $8, $6, $8, $12 and $16
- Up to the third unit, each unit adds more to revenue than to cost (MR > MC); the fourth adds $10 to revenue but $12 to cost, so it would cut profit
- At 3 units: total revenue $54 − total cost $32 = profit of $22, with average cost $32 ÷ 3 = $10.67
- Check the neighbours: profit is $40 − $24 = $16 at 2 units and $64 − $44 = $20 at 4 units, so 3 units is the maximum
- Normal profit is already in total cost, so the $22 is supernormal profit; and a price of $18 against a marginal cost of $8 shows output is below the allocatively efficient level
Answer: 3 units a day at $18 each, for a supernormal profit of $22 a day
Written by Momentum for this page, with its own numbers; it is not taken from a past paper.
Mistakes that cost marks
- Letting two indifference curves cross — each curve is one level of satisfaction, so a shared point would have to give two different levels at once
- Calling any harm from a good a negative externality — an externality falls on a third party outside the transaction; the damage smoking does to the smoker is a private cost
- Reading a monopolist's price from the marginal cost curve — output is set where MC = MR, but the price is read from that output up to the average revenue curve
- Treating normal profit as zero profit in the everyday sense — normal profit is a cost, the opportunity cost of the entrepreneur's resources, so a firm earning only normal profit covers all its costs
- Drawing long-run equilibrium in monopolistic competition with average revenue cutting average cost — in the long run AR is tangent to AC at an output below minimum average cost, so firms earn normal profit and have excess capacity
Exam technique
- In Paper 3 diagram questions, read systematically: find the output where MC = MR, go up to AR for the price and to AC for the cost per unit, then compare price with AC for profit and with MC for allocative efficiency
- In data-response questions on firms, use the evidence on the number of firms, barriers to entry and how prices are set to identify the market structure before you analyse it
- In essays, draw the diagram that carries the argument and refer to it: an externality diagram for market failure, cost and revenue curves for monopoly, a kinked demand curve or a pay-off matrix for oligopoly
- Evaluate market structures over time as well as at a point in time: a monopoly's supernormal profit can fund research that brings dynamic efficiency, and economies of scale can give it lower costs than many small firms
Practising in Momentum
- Every question in a chapter as one list, from every paper and year in the bank, newest first or shuffled.
- Each question turns over to its own part of the mark scheme, where the board published one.
- Narrow by paper, year, session, zone and marks, and star the questions worth keeping.
- Pick chapters, a number of questions and a time, and the exam builder draws a mock to sit and mark.
Past-paper questions and mark schemes are the copyright of Cambridge International. Momentum shows them to signed-in learners for revision and does not publish them on these pages.