Demand & Supply
Overview
- Market decisions depend on Demand (consumer side) and Supply (producer side).
- Both together create Equilibrium in the market.
Demand
Meaning
- Based on:
- Utility (Satisfaction)
- Affordability
- Eagerness to buy
Marginal Utility
- Extra satisfaction gained from consuming one additional unit of a good/service.
Memory: MU = “More Unit → More Utility (small)”.
Demand Curve
- Shows consumer affordability at different prices.
- Usually slopes downward (price ↑ → demand ↓).
Supply
Supply Curve
- From producer’s side, based on profitability.
- Slopes upward (price ↑ → producers supply more).
Market Equilibrium
- Point where Demand = Supply.
- Market becomes stable (no shortage/surplus).
Exceptions to Law of Demand
Giffen Goods
- Non-luxury, essential goods.
- When price increases, demand increases (due to low-income trap).
- Example: Wheat
Veblen Goods
- Luxury/status goods.
- High price increases prestige, so demand rises.
- Example: iPhone, Mercedes
Perfectly Inelastic Demand
- Demand does not change even if price changes.
- Often applies to goods with no substitutes.
Elasticity Concepts
Price Elasticity of Demand (PED)
- Measures how demand changes when price changes (usually negative relation).
Types
- Perfectly Elastic Demand (tiny change in price → infinite change in demand)
- Relatively Elastic Demand
- Perfectly Inelastic Demand (price change → no change in demand)
- Relatively Inelastic Demand
Income Elasticity
- Shows relation between income change and demand for goods.
Cross Price Elasticity
- Shows how demand of one good changes when price of another good changes
(substitutes & complements).
Why People Hold Money (Keynes)
Transaction Motive
- Daily transactions (buying essentials).
Precautionary Motive
- Future uncertainties; “just in case” money.
Speculative Motive
- To invest when opportunities arise (buy assets when prices fall).
Keynes = Father of Modern Macroeconomics.
Famous Economists
- J.M. Keynes → Speculative motive
- Adam Smith → Father of Modern Economics
Types of Markets
Monopoly
- One seller, strong entry barriers.
- Example: Indian Railways
Oligopoly
- Few dominant sellers, many buyers.
- No easy entry.
- Example: Telecom, Laptop market
Monopolistic Competition
- Many sellers/buyers, products slightly different.
- Example: Toothpaste brands
Perfect Competition
- Many buyers & sellers, free entry/exit, homogeneous products.
- Example: Agricultural goods
Memory Tricks (Quick Revision)
- Demand ↓ when price ↑ except Giffen & Veblen.
- MU = More Unit → Less Utility but still added satisfaction.
- PED: Elastic = ‘Easily changes’, Inelastic = ‘Not changing’.
- Keynes motives: T-P-S = Today, Protection, Speculation.
- Market Types Order (Most → Least competition):
Perfect → Monopolistic → Oligopoly → Monopoly.