Demand and Supply
Demand and Supply
A.2.1] Laws of Demand and Supply
Law of Demand
- Definition: Quantity demanded increases as price decreases, ceteris paribus.
- Key Points:
- Inverse relationship between price and quantity demanded.
- Price is the only variable in the law; other factors are held constant.
- Graphical Representation: Downward sloping demand curve.
- Example: If the price of apples falls, more people buy apples.
Law of Supply
- Definition: Quantity supplied increases as price increases, ceteris paribus.
- Key Points:
- Direct relationship between price and quantity supplied.
- Price is the only variable in the law; other factors are held constant.
- Graphical Representation: Upward sloping supply curve.
- Example: If the price of wheat rises, farmers produce more wheat.
Law of Supply and Demand in Equilibrium
- Equilibrium Price: Price at which quantity demanded equals quantity supplied.
- Equilibrium Quantity: Quantity at which demand and supply are balanced.
- Graphical Representation: Intersection of demand and supply curves.
- Example: In the market for smartphones, the equilibrium price is determined by the intersection of demand and supply curves.
A.2.2] Influencing Factors
Factors Affecting Demand
| Factor | Description | Example |
|---|---|---|
| Income | Change in income affects demand. | Increase in income leads to higher demand for luxury goods. |
| Prices of Related Goods | Substitute and complementary goods. | Increase in price of tea may increase demand for coffee. |
| Tastes and Preferences | Shifts in consumer preferences. | Rise in health consciousness increases demand for organic products. |
| Expectations | Future price expectations. | If people expect prices to rise, they may buy more now. |
| Number of Buyers | More buyers increase demand. | Population growth increases demand for housing. |
Factors Affecting Supply
| Factor | Description | Example |
|---|---|---|
| Input Prices | Increase in input costs reduces supply. | Higher cost of steel reduces supply of cars. |
| Technology | Technological advancement increases supply. | Automation in manufacturing increases supply of goods. |
| Prices of Related Goods | Production of substitute goods. | Higher price of wheat may shift production to corn. |
| Expectations | Future price expectations. | If producers expect prices to fall, they may reduce current supply. |
| Number of Sellers | More sellers increase supply. | Entry of new firms increases supply of smartphones. |
Shifts in Demand and Supply Curves
| Type | Direction | Cause |
|---|---|---|
| Increase in Demand | Rightward shift | Income rise, taste change, etc. |
| Decrease in Demand | Leftward shift | Income fall, taste change, etc. |
| Increase in Supply | Rightward shift | Technological advancement, lower input costs, etc. |
| Decrease in Supply | Leftward shift | Higher input costs, technology decline, etc. |
A.2.3] Effects on Economy
Price Determination
- Role of Demand and Supply: Prices are determined by the interaction of demand and supply.
- Market Clearing: Prices adjust until demand equals supply.
- Example: In a competitive market, prices adjust to eliminate surpluses or shortages.
Market Equilibrium
- Definition: State where quantity demanded equals quantity supplied.
- Importance: Ensures efficient allocation of resources.
- Example: In the market for rice, equilibrium price ensures that supply meets demand.
Surplus and Shortage
| Condition | Description | Example |
|---|---|---|
| Surplus | Quantity supplied > Quantity demanded | Too much supply leads to falling prices. |
| Shortage | Quantity demanded > Quantity supplied | Too little supply leads to rising prices. |
Government Intervention
- Price Controls: Ceiling (maximum price) and floor (minimum price).
- Example: Minimum wage laws set a floor on wages.
- Impact: Can lead to shortages or surpluses if not aligned with market forces.
Elasticity and Market Response
- Price Elasticity of Demand: Measures responsiveness of quantity demanded to price changes.
- Price Elasticity of Supply: Measures responsiveness of quantity supplied to price changes.
- Example: Luxury goods have high elasticity; necessities have low elasticity.
Economic Implications
- Efficiency: Equilibrium ensures efficient resource allocation.
- Inequality: Price controls can lead to market distortions and inequality.
- Stability: Fluctuations in demand and supply can affect economic stability.
A.2.4] Important Dates and Terms
Key Terms
- Equilibrium Price
- Equilibrium Quantity
- Surplus
- Shortage
- Price Elasticity
- Market Clearing
- Ceteris Paribus
Important Dates
- 1871: Alfred Marshall formalized the theory of supply and demand in Principles of Economics.
- 1936: John Maynard Keynes introduced the idea that demand-side factors influence economic activity.
A.2.5] Frequently Asked Questions (SSC, RRB)
Common Questions
- What is the law of demand?
- What is the law of supply?
- How do demand and supply determine price?
- What causes a shift in the demand curve?
- What is market equilibrium?
- What are the effects of price controls?
Quick Facts
- Demand and supply are fundamental to microeconomics.
- Equilibrium ensures efficient resource allocation.
- Government intervention can distort market mechanisms.
- Elasticity measures responsiveness to price changes.
- SSC and RRB exams often test understanding of basic laws and effects.
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