Foundations of Micro/Macroeconomics · Demand & Supply Laws · Elasticity · Market Structures — SSC / Railway / UPSC / BPSC
The classical wealth-oriented view is associated with Adam Smith. Modern economics studies choice under scarcity, resource allocation, production, distribution, consumption and welfare.
Effective demand = Desire + Willingness + Ability to buy a quantity at a given price and time
Own price and quantity demanded are inversely related, ceteris paribus; an own-price change causes movement along the same demand curve.
Example: When price is ₹1, quantity demanded is 3 units. When price is ₹3, quantity demanded is 1 unit.
| Type of Good | Income Effect | Price Effect |
|---|---|---|
| Normal Goods | Positive (+): As income ↑, demand ↑ | Negative (–): As price ↑, demand ↓ |
| Inferior Goods | Negative (–): As income ↑, demand ↓ | — |
| Giffen Goods | Negative (–): As income ↑, demand ↓ | Positive (+): As price ↑, demand ↑ |
Elasticity of demand measures the responsiveness of quantity demanded to changes in own price, income or the price of a related good.
Measures change in quantity demanded of a commodity with respect to changes in buyer's income.
Measures the percentage change in quantity demanded of one good (A) in response to a percentage change in price of another related good (B).
Measures changes in quantity demanded of a commodity with respect to changes in its own price.
| Type | Description |
|---|---|
| Perfectly Elastic Demand | Horizontal curve; infinite elasticity in the idealised case |
| Perfectly Inelastic Demand | Vertical curve; quantity demanded is unchanged; elasticity = 0 |
| Unitary Elastic Demand | Equal absolute percentage changes in own price and quantity demanded; |Ep| = 1 |
| Relatively Elastic Demand | Percentage change in quantity demanded exceeds percentage change in own price in absolute value; |Ep| > 1 |
| Relatively Inelastic Demand | Percentage change in quantity demanded is smaller than percentage change in own price in absolute value; |Ep| < 1 |
Supply: Quantities producers are willing and able to offer at various prices during a given period, other things equal.
More money supply does not guarantee an equal increase in real output: effects depend on prices, interest rates, expectations and capacity. A higher market interest rate tends to reduce desired money balances by raising the opportunity cost of holding money.
| Market Form | Key Features |
|---|---|
| Perfect Competition | Large number of buyers and sellers · Free entry and exit of firms · Homogeneous goods · Same price · Price determined by demand and supply (market forces) |
| Monopoly | Only one seller · No close substitutes · Restrictions on entry of firms · Price maker constrained by market demand · Demand curve less elastic than monopolistic competition |
| Monopolistic Competition | Many buyers and sellers · Seller's product differs from others · Product differentiation (colour, design, size, etc.) |
| Oligopoly | Limited number of firms · Large number of buyers · Barriers to entry (not easy) · Price/output decisions of one firm affect others |
| Topic | Key Fact |
|---|---|
| Father of Economics | Adam Smith (Scotland, Britain) |
| Economics Etymology | Greek "Oikonomia" (Oikos = House, Nomos = Management) |
| Adam Smith's Book | An Inquiry into the Nature and Causes of the Wealth of Nations (1776) |
| Demand–Supply Analysis | Alfred Marshall (1890) — Principles of Economics |
| Microeconomics | Study of individual units (firm, industry, market) |
| Macroeconomics | Study of overall economy (national income, unemployment, poverty) |
| Law of Demand | Inverse own-price–quantity-demanded relationship, other factors constant |
| Giffen Goods | Strongly inferior good; income effect outweighs substitution, so quantity demanded can rise with own price |
| Veblen Goods | Prestige goods — luxury watches, designer handbags and high-end status cars |
| Normal Goods | Income Effect (+), Price Effect (–) |
| Inferior Goods | Income Effect (–) |
| Giffen Goods (Effects) | Income Effect (–), Price Effect (+) |
| Income Elasticity | Ey = % change in quantity demanded ÷ % change in income |
| Cross Elasticity | Ec = % change in qty demanded of A ÷ % change in price of B |
| Price Elasticity | Ep = % change in quantity demanded ÷ % change in own price |
| Law of Supply | Positive own-price–quantity-supplied relationship, other factors constant |
| Supply Curve | Generally upward sloping |
| Market Equilibrium | Quantity demanded = Quantity supplied; neither shortage nor surplus |
| Perfect Competition | Large buyers/sellers; homogeneous goods; price by market forces |
| Monopoly | One seller; no close substitutes; price maker constrained by demand |
| Monopolistic Competition | Many sellers; differentiated products |
| Oligopoly | Limited firms; barriers to entry; interdependence of firms |