Law Of Demand: Law of demand states that there is an inverse relation between the price

of a commodity and its quantity demanded, assuming all other factors affecting demand
remain constant. It means that when the price of a good falls, the demand for the good rises
and when price rises, the demand falls.
Law of demand may be explained with the help of the following demand schedule and
demand curve:

The above table and diagram show that as the price of the good reduces from Rs 5 to Rs 4,
the demand for the good increases from 100 to 200 units.
Assumption of the law of demand: The law of demand is valid only when all other factors
determining demand like income of the buyers, price of related goods, tastes and preferences
of the buyer etc. remain constant.
Causes of the law of demand: When the price of a good falls,
it has following two effects that lead a consumer to buy more of that commodity.
(i) Income effect: When the price of a commodity falls, the real income of the consumer, i.e.,
his purchasing power increases. As a result, he can now buy more of a commodity. This is
called income effect. This causes increase in the quantity demanded of the good whose price
falls.
(ii) Substitution effect: When the price of a commodity falls, it becomes relatively cheaper
than others. This induces the consumer to substitute this cheaper commodity for the other
goods which are relatively expensive. This is called as the substitution effect. This causes
increase in quantity demanded of the commodity whose price has fallen.
Thus, as a result of the combined operation of the income effect and substitute effect, the
quantity demanded of a commodity increases with a fall in the price.
In case of giffen goods, the demand shares a positive relationship with price. As the price of
giffen goods fall the demand for such goods falls.

Law Of Supply: The law of supply is a microeconomic law. It states that, all
other factors being equal, as the price of a good or service increases, the
quantity of that good or service that suppliers offer will increase, and vice
versa. In other words, when the price paid by buyers for a good rise, then
suppliers increase the supply of that good in the market.
The chart below depicts the law of supply using a supply curve, which is
upward sloping. A, B, and C are points on the supply curve. Each point on
the curve reflects a direct correlation between quantity supplied (Q) and
price (P). So, at point A, the quantity supplied will be Q1 and the price will
be P1, and so on.

The supply curve is upward sloping because, over time, suppliers can
choose how much of their goods to produce and later bring to market. At
any given point in time, however, the supply that sellers bring to market is
fixed, and sellers simply face a decision to either sell or withhold their
stock from a sale; consumer demand sets the price, and sellers can only
charge what the market will bear.

If consumer demand rises over time, the price will rise, and suppliers can
choose to devote new resources to production (or new suppliers can enter
the market), which increases the quantity supplied. Demand ultimately sets
the price in a competitive market; supplier response to the price they can
expect to receive sets the quantity supplied.

The law of supply is one of the most fundamental concepts in economics.

It works with the law of demand to explain how market economies allocate
resources and determine the prices of goods and services.

Factor Effecting Demand: the factors which affect the quantity demanded of a
product, describing the nature of these factors, examining how they can be measured, and
examining the relationship with quantity demanded.

These factors can be considered in terms of a demand function:

Q = f (P, L, A, D, Y, …….) where each symbol on the right-hand side denotes a relevant
factor. P refers to price of the product or service under consideration, L to quality, A to
advertising spending, D to distribution spending and Y to the average income of the market.
It is useful from a managerial decision-making viewpoint to distinguish between controllable
and uncontrollable factors. Controllable in this context means controllable by the firm; the
distinction in practice between what can be controlled and what cannot be somewhat blurred,
as will be seen. The factors again can be categorized as Controllable vis-à-vis Uncontrollable
factors. Controllable factors are those factors which can be controlled by the marketer or
producer or seller or supplier of the product or service and uncontrollable factors are those
factors upon which the marketers have least control to exercise. We can also say that
controllable factors correspond to what are often referred to as the Marketing Mix Variables.
When price changes, quantity demanded will change  movement along the same demand
curve. When factors other than price change, demand curve will shift either rightward or
leftward.

Factor Effecting Supply:

1. A decrease in costs of production. This means business can

supply more at each price. Lower costs could be due to lower
wages, lower raw material costs
2. More firms. An increase in the number of producers will
cause an increase in supply.
3. Investment in capacity. Expansion in the capacity of existing
firms, e.g. building a new factory
4. The profitability of alternative products. If a farmer sees
the price of biofeuls increase, he may switch to growing crops
for biofuels on all his fields and this will lead to a fall in the
supply of food, such as wheat.
5. Related supply. If there is an increase in the supply of beef
(from cows) then there will also be an increase in the supply of
leather.
6. Weather. Climatic conditions are very important for
agricultural products
7. Productivity of workers. If workers become more motivated
and work hard, then there will be a significant increase in
output and supply.
8. Technological improvements. Improvements in technology,
e.g. computers or automation, reducing firms costs.
9. Lower taxes. Lower direct taxes (e.g. tobacco tax, VAT) reduce
the cost of goods.
10. Government subsidies. Increase in government
subsidies will also reduce the cost of goods, e.g. train
subsidies reduce the price of train tickets.
 11. Objectives of firms. If firms are profit maximisers and
collude with other firms, we may see a fall in supply as they try
to maximise profits. However, if they switch to targetting sales
or revenue maximisation, then we will see an increase in
supply.

Equilibrium Point:

Law Of Production: The production laws describe the technically possible

ways to increase the level of production. Production can be increased in various
ways. The laws of production in economics are related to the concepts of cost and
equilibrium of producers. It is an important aspect of economics as it helps the
company determine the level of production that leads to maximum profit. It also
defines the various fixed and variable costs of the business. The Two Laws of
Production are as follows:
1. Law of variable proportions: The law of variable proportion is considered an
important principle in economics. This is known as the law that states that when the
quantity of a factor of production increases while holding all other factors constant,
there will be a fall in the marginal product of that factor. The law of variable
proportion is also known as the law of proportionality. When the variable factor is
exceeded, it can lead to a negative value of the marginal product. The law of variable
proportion can be understood as follows.
 When the variable factor increases keeping all other factors constant, the
total product will initially increase at an increasing rate, then it will
increase at a decreasing rate, and
 finally, the rate of production will decrease.

3 stages of Law of variable Proportion

First stage: Increasing Returns Stage
Total product rises at a growing pace in this stage and fixed factors’ efficiency improves when
further units of the variable aspects are added to them. The slant of the total product curve T.P is
growing from the beginning to the point F in the figure, i.e. the curve T.P is concave up to the
point [.F], implying that marginal product M.P of labour grows. The point of inflexion is defined as
the point [F] wherever total product ceases to grow at a growing pace and begins to decrease.
The marginal product of labour reaches its maximum vertically at this point of inflexion, after
which it begins to decline. As the avg. product curve of the irregular factor grows during this
phase, it is known as the stage of growing returns. The avg. product curve reaches its maximum
peak at the end of this stage.
Second stage: Diminishing Returns
During this stage, the T.P grows slowly till it ranges its extreme point H when the 2nd stage
finishes. Equally marginal product (M.P) and the avg. product of labour is decreasing at this
point, but they are still positive. The fixed factor’s amount is insufficient compared to the variable
factor’s quantity. The marginal product(M.P) of labour is 0 after the 2nd stage, at point M, which
parallels the extreme point H of total product arc T.P. This phase is critical because the company
will strive to produce within this range.
Third stage: Negative Returns Stage
As the total product decreases in stage iii, the {T.P] curve slants down. As a result, the marginal
product of labour goes beneath the axis X, and the [M.P] curve is -ve. At this point, the variable
aspect (labour) has outweighed the fixed factor.

Law of return to scale: The law of variable proportions emerges because factor
proportions change as long as one factor is held unchanged and the other is raised. What if
both factors can change (differ)?

 Always remember that this can occur only in the long run. One special case, in the
long run, happens when both the factors are raised by the same number of factors are
ascended up.
 When a proportionate increase in all inputs results in the rise in output by the same
proportion, the production function is said to exhibit Constant returns to scale (CRS).
 When a proportionate increase in all inputs results in the rise in output by the larger
proportion, the production function is said to exhibit an Increasing Returns to Scale
(IRS).
 Decreasing Returns to Scale (DRS) occurs when a proportionate increase in all inputs
results in a rise in output by a smaller proportion.
 For instance, presume in a manufacturing procedure, all inputs get doubled. As an
outcome, if the output gets doubled, the manufacturing procedure displays CRS. If the
output is less than doubled, then DRS occurs and if it is more than doubled, then IRS
occurs.
 The laws of returns to scale are the rules that regulate the size of a business.
Importance Of National Income:

 Know the Production performance & achievements.

 Indicates the living standards of the people.

 Know whether a country is growing, stagnant or declining.

 Shows the contribution made by various sectors towards

National Income.
 Know the purchasing power of money.

 Contains figures of consumption, savings, investments,

imports & exports.

 Know relative roles played by public & private sector.

 Helps central government to decide number of grants-in-

aids to different state governments.

 Valuable guide to formulate economic policies.

 Reveals cyclic behaviour of an economy and also helps in

forecasting.