1.1 Demand and Supply by Ayussh Sanghi

Demand and
Supply
UPSC Prelims
PDF FILE OF PPT
for – Unacademy Plus Candidates [Exclusively]

chapter – Demand & Supply [Indian Economy]
by – Ayussh Sanghi
Supply-and-demand is a model for understanding
Demand & Supply the determination of the price of quantity of a
good sold on the market.
The explanation works by looking at two

different groups – buyers and sellers – and
asking how they interact.
The relationship between demand and supply

underlie the forces behind the allocation of
resources. In market economy theories, demand
and supply theory will allocate resources in the
most efficient way possible.
© Economy for Prelims by Ayussh Sanghi

The theory of
the consumer
And
The theory of
the firm
The theory of the consumer deals with
consumption (the demand for goods and

services) by utility-maximizing individuals
These are the individuals who make

Theory of the decisions that maximize the satisfaction
received from present and future
consumer consumption
Theory of the firm
The theory of the firm deals with the supply of goods and services by profit-
maximizing firms.
The theory of the consumer and the theory of the firm are important because they
help us understand the foundations of demand and supply.

TYPES OF MARKETS
Markets
A market is any arrangement that enables buyers and sellers to get information and do
business with each other.
A competitive market is a market that has many buyers and many sellers so no single
buyer or seller can influence the price.

Factor markets are markets for the purchase

and sale of factors of production.
In capitalist private enterprise economies,

households own the factors of production
(the land, labor, physical capital, and
Factor markets materials used in production).
In the factor market for labor, households

are sellers and firms are buyers.
Goods ● Goods markets are markets for the output of
production
markets
● From an economics perspective, firms, which
ultimately are owned by individuals either singly or
in some corporate form, are organizations that buy
the services of those factors
● In goods markets: firms are sellers and both

households and firms are buyers.

Intermediate goods Intermediate goods and services are those
purchased for use as inputs to produce other goods
and services
and services, whereas final goods and services are
in the final form purchased by households.
These two types of interaction between the

household sector and the firm sector—those
related to goods and those related to services—
take place in factor markets and goods markets,
respectively.

Previous Years MCQ Buyers’ market denotes the place where
(a) The demand exceeds the supply
(b) The supply exceeds the demand
(c) The demand and supply are well balanced
(d) Commodities are available at competitive

rates
Correct Answer: B

Demand- Basic principles
and concepts
Demand Demand, in economics, is the willingness and

ability of consumers to purchase a given amount of
a good or service at a given price.
If you demand something, then you
1. Want it,
2. Can afford it, and
3. Have made a definite plan to buy it

Law of
Demand
The quantity consumers are willing to buy clearly depends on
a number of different factors called variables.
The most important of those variables is the item’s own price.
As the price of a good rises, buyers will choose to buy less of

it, and as its price falls, they buy more.
This is such a ubiquitous observation that it has come to be

called the law of demand.

The law of demand results from
Origin of the law

of demand ❖ Substitution effect
When the relative price (opportunity cost) of a good or service

rises, people seek substitutes for it, so the quantity demanded of
the good or service decreases.
❖ Income effect
When the price of a good or service rises relative to income,

people cannot afford all the things they previously bought, so the
quantity demanded of the good or service decreases.
Demand Curve and Demand
Schedule
The term demand refers to the entire relationship between the price of the good
and quantity demanded of the good.
A demand curve shows the relationship between the quantity demanded of a good
and its price when all other influences on consumers’ planned purchases remain
the same.
A demand curve is also a willingness-and-ability-to-pay curve.

Change in There are Six main factors that change demand
Demand ➔ The prices of related goods

➔ Expected future prices
➔ Income
➔ Expected future income and credit
➔ Population
➔ Preferences

Supply- Basic Principles and
Concepts
Supply
The willingness and ability to sell a good or service is called supply.
The willingness to supply, called the supply function, depends on the

price at which the good can be sold as well as the cost of production
for an additional unit of the good.
The greater the difference between those two values, the greater is the
willingness of producers to supply the good

Law of Supply
Other things remaining the same, the higher the price of a good, the greater is the
quantity supplied; and the lower the price of a good, the smaller is the quantity supplied.
The law of supply results from the general tendency for the marginal cost of producing
a good or service to increase as the quantity produced increases.

If a firm supplies a good or service, then the firm:
1. Has the resources and the technology to produce it,

Factors of
supply 2. Can profit from producing it, and
3. Has made a definite plan to produce and sell it.
Resources and technology determine what it is possible to

produce.
Supply reflects a decision about which technologically

feasible items to produce

Supply Curve and The term supply refers to the entire relationship
between the quantity supplied and the price of a
Supply Schedule
good.
The supply curve shows the relationship between

the quantity supplied of a good and its price
when all other influences on producers’ planned
sales remain the same.
A rise in the price of an item, other thing

remaining the same, brings an increase in the
quantity supplied.

Supply Curve

A supply curve is also a minimum-
supply-price curve.

As the quantity produced increases,
Minimum Supply marginal cost increases.
Price
The lowest price at which someone is
willing to sell an additional unit rises.
This lowest price is marginal cost.
Change in The six main factors that change supply of
a good are
Supply

➔ The prices of factors of production
➔ The prices of related goods produced
➔ Expected future prices
➔ The number of suppliers
➔ Technology
➔ State of nature
The supply-side economics lays greater
emphasis on the point of view of :
(a) producer
(b) consumer
Previous Year
MCQ (c) global economy
(d) middle-man
Correct Answer: B

Market Equilibrium
Equilibrium is a situation in which opposing forces balance each other. Equilibrium in a
market occurs when the price balances the plans of buyers and sellers.
The equilibrium price is the price at which the quantity demanded equals the quantity
supplied.
The equilibrium quantity is the quantity bought and sold at the equilibrium price.

Elasticity
Elasticity refers to the degree of responsiveness of one
variable to another.
A simple way to see the degree of responsiveness is simply to

look at the slope.
A flatter demand curve represents a greater degree of

responsiveness (for a supply or demand curve)

Elastic demand curve

The extremes are easy to remember:
A perfectly elastic demand curve is horizontal, because

an infinitely small change in price corresponds to an
infinitely large change in quantity; the graph looks like
Understanding elastic the letter E for elastic.
demand curve A perfectly inelastic demand curve is vertical, because

quantity will never change regardless of the change in
price; the graph looks like the letter I (for inelastic).

Factors of production
Factors of production is an The factors of production At the core, land, labor, capital
economic term that describes include land, labor, capital and and entrepreneurship
the inputs that are used in the entrepreneurship encompass all of the inputs
production of goods or services needed to produce a good or
in order to make an economic service
profit

Land represents all Labor includes all of the
Factors of natural resources, such as work that laborers and

production timber and gold, used in workers perform at all levels
the production of a good of an organization, except
for the entrepreneur
The entrepreneur is the Capital is made up of

individual who takes an idea all of the tools and
and attempts to make an machinery used to
economic profit from it by produce a good or
combining all other factors of service
production
Capital Output ratio
Capital output ratio is the amount
What is Capital of capital needed to produce one
unit of output
to Output Ratio
If this ratio is high, even high
savings can’t be transformed into
significant output

Prelims 2018 Despite being a high saving economy, capital
Question formation may not result in significant increase in

output due to
(a) weak administrative machinery
(b) illiteracy
(c) high population density
(d) high capital-output ratio
Correct Answer: D
● In market economies, there are a variety of
different market systems that exist, depending
on the industry and the companies within that
industry
Types of Markets The major classification is as follows:
1. Monopolistic
2. Oligopoly and
3. Perfect Competition

Monopolistic Competition
Types of
Markets
● Monopolistic competition is a type of market system combining elements

of a monopoly and perfect competition
● Like a perfectly competitive market system, there are numerous

competitors in the market
● The difference is that each competitor is sufficiently differentiated from

the others that some can charge greater prices than a perfectly
competitive firm
● An example of monopolistic competition is the market for music

Types of
Markets
Oligopoly
● An oligopoly is similar in many ways to a monopoly

● The primary difference is that rather than having only one
producer of a good or service, there are a handful of producers
that make up a dominant majority of the production in the
market system
● Oligopolists do not have the same pricing power as monopolists

but they may collude with one another to set prices in the same
way a monopolist would
Types of
Markets
Perfect Competition
● Perfect competition is a market system characterized by many

different buyers and sellers
● In the classic theoretical definition of perfect competition, there

are an infinite number of buyers and sellers
● With so many market players, it is impossible for any one

participant to alter the prevailing price in the market

Types of Goods
Goods on basis of quality can be classified as:
1. Normal
2. Inferior
3. Giffen
4. Durable and Non-Durable Goods

Types of Normal good
goods

● A normal good means an increase in income causes
an increase in demand
● It has a positive income elasticity of demand
Inferior good
● An inferior good means an increase in income causes

a fall in demand
● It is a good with a negative income elasticity of
demand
Types of Giffen good
goods ● A rare type of good, where an increase in price

causes an increase in demand
● The reason is that the income effect of a rise in
the price causes you to buy more of this cheap
good because you can’t afford more expensive
goods
● For example, if the price of wheat rises, a poor
peasant may not be able to afford meat
anymore, so has to buy more wheat.
Types of Durable goods
goods ● Durable goods are those goods that don’t wear out

quickly and last over a long period.
● Examples of durable goods include land, cars, and
appliances.
Non-durable goods
● Non-durable goods or soft goods are those goods that

have a short life cycle.
● They are used up all at once or have a lifespan of
fewer than three years. For example light bulbs, paper
products, and food products.
Concept of Opportunity Cost
What is Opportunity Cost?
Opportunity cost refers to a benefit An opportunity cost represents an

that a person could have received, alternative given up when a
but gave up, to take another course decision is made
of action

If a commodity is provided free to the public by the
Prelims 2018 Government, then

Question
(a) the opportunity cost is zero.
(b) the opportunity cost is ignored.
(c) the opportunity cost is transferred from the

consumers of the product to the tax-paying public.
(d) the opportunity cost is transferred from the

consumers of the product to the Government
Correct Answer: D

1.1 Demand and Supply by Ayussh Sanghi

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Demand and

for – Unacademy Plus Candidates [Exclusively]

The explanation works by looking at two

The relationship between demand and supply

© Economy for Prelims by Ayussh Sanghi

© Economy for Prelims by Ayussh Sanghi

These are the individuals who make

© Economy for Prelims by Ayussh Sanghi

© Economy for Prelims by Ayussh Sanghi

© Economy for Prelims by Ayussh Sanghi

In capitalist private enterprise economies,

In the factor market for labor, households

● In goods markets: firms are sellers and both

© Economy for Prelims by Ayussh Sanghi

These two types of interaction between the

© Economy for Prelims by Ayussh Sanghi

(a) The demand exceeds the supply

(b) The supply exceeds the demand

(c) The demand and supply are well balanced

(d) Commodities are available at competitive

© Economy for Prelims by Ayussh Sanghi

© Economy for Prelims by Ayussh Sanghi

If you demand something, then you

2. Can afford it, and

3. Have made a definite plan to buy it

The most important of those variables is the item’s own price.

As the price of a good rises, buyers will choose to buy less of

This is such a ubiquitous observation that it has come to be

© Economy for Prelims by Ayussh Sanghi

© Economy for Prelims by Ayussh Sanghi

When the relative price (opportunity cost) of a good or service

When the price of a good or service rises relative to income,

A demand curve is also a willingness-and-ability-to-pay curve.

© Economy for Prelims by Ayussh Sanghi

Demand ➔ The prices of related goods

© Economy for Prelims by Ayussh Sanghi

The willingness to supply, called the supply function, depends on the

© Economy for Prelims by Ayussh Sanghi

© Economy for Prelims by Ayussh Sanghi

1. Has the resources and the technology to produce it,

3. Has made a definite plan to produce and sell it.

Resources and technology determine what it is possible to

Supply reflects a decision about which technologically

© Economy for Prelims by Ayussh Sanghi

The supply curve shows the relationship between

A rise in the price of an item, other thing

© Economy for Prelims by Ayussh Sanghi

© Economy for Prelims by Ayussh Sanghi

© Economy for Prelims by Ayussh Sanghi

© Economy for Prelims by Ayussh Sanghi

© Economy for Prelims by Ayussh Sanghi

© Economy for Prelims by Ayussh Sanghi

A simple way to see the degree of responsiveness is simply to

A flatter demand curve represents a greater degree of

© Economy for Prelims by Ayussh Sanghi

© Economy for Prelims by Ayussh Sanghi

A perfectly elastic demand curve is horizontal, because

demand curve A perfectly inelastic demand curve is vertical, because

© Economy for Prelims by Ayussh Sanghi

© Economy for Prelims by Ayussh Sanghi

© Economy for Prelims by Ayussh Sanghi

The entrepreneur is the Capital is made up of

© Economy for Prelims by Ayussh Sanghi

© Economy for Prelims by Ayussh Sanghi