Micro Economics Concept (Demand & Supply)

Micro Economics Concept

"The Economy is the beginning and end of everything"

• Demand and Supply 

Demand - It is the quantity of a commodity which and individual is willing and able to buy at a particular price.

Demand Curve - It shows the relationship between quantity demanded (Q) and price (P).

Law of demand - It states that the quantity demanded of a commodity increases with the fall in its price and vice-versa, provided other things being constant (Ceteris paribus).

• i.e.,   ↓ Price → Quantity demanded ↑

i.e., There is an inverse relation (not inversely proportional) between Quantity demanded and Price of the commodity.

Shifting of Demand Curve 

i.e., 

• Demand ↑ → Right ward shift of the demand curve &
• Demand ↓ → Left ward shift of the demand curve

Determinants of demand 

1. Price
2. Income of the consumer
3. Price of the related commodities (substitute & complementary)
4. Taste and preferences of the consumer
5. Expectation of the change in price in future
6. Change in season, etc.

Price - 

• Price ↓ → Quantity demanded ↑

Income of the consumer - 

• Income ↑ → Quantity demanded ↑
• Increase in income of the consumer also leads to the rightward shift of the demand curve.

Price of related commodities 

1. Substitute commodities (such as tea & coffee)
• Price of substitute (coffee) ↑ → Demand of commodity (tea) ↑
2. Complementary commodities (such as petrol & car)
• Price of petrol ↑ → Demand of car ↓

Taste and preferences of the consumer 

• Favourable change → increase in demand → rightward shift of the demand curve
• Unfavourable change → decrease in demand → leftward shift of the demand curve

Therefore, Advertisement is done to create a favourable change/preference.

Supply - It is the quantity of a commodity which is offered for sale by a firm at a particular price.

Supply Curve - It shows the relationship between the price of the commodity and the supply of the commodity.

Law of supply - It states that the quantity supplied of a commodity increases with the increase in its price (in market) and vice-versa.

i.e., Quantity supplied is positively related to the price of the commodity.

• Price ↑ → Quantity supplied ↑ 

Shifting of Supply Curve 

i.e., 

• Quantity supplied ↓ → Leftward shift of the supply curve
• Quantity supplied ↑ → Rightward shift of the supply curve

Determinants of Supply -

1. Price of the commodity
2. Cost of production
3. Change in tax rates
4. Change introduced by technology
5. Goals (achieved), etc.

Price of the commodity 

• Price ↓ → Quantity supplied ↓ → Rightward shift of the supply curve

Cost of production 

• Cost of Production ↑ → Supply ↓ → Rightward shift of the supply curve

Change in tax rates 

• Increase in Tax rates → Decrease in supply
• Decrease in Tax rates → Increase in supply

That's why government reduces taxes to boost production.

Change in Technology 

• Favourable change (automation) → Increase in supply

Goals 

• Goals (if achieved) → Increase in supply

Market Supply and Market Demand 

• Market Demand - It is the summation of demands of all consumers.
• Market Supply - It is the summation of supplies of all sellers.

Market Equilibrium - It is a situation in which quantity demanded of a commodity is equal to quantity supplied.

i.e., Quantity supplied = Quantity demanded

It is the point of intersection of Demand Curve and Supply Curve.

It is an ideal situation because consumer utility/satisfaction is maximum and firm profit is also maximum.

Shortage and Excess Supply 

Shortage is the condition where demand exceeds supply and Excess supply is the condition where supply exceeds demand.

• Decrease in Price → Decrease in Supply & Increase in Demand → Shortage 
• Increase in Price → Increase in Supply & Decrease in Demand → Excess Supply 

Market Mechanism/Price Mechanism/Invisible Hand - It refers to an automatic process through which equilibrium is determined and maintained in a market on the basis of demand and supply.

Adam Smith called this mechanism Invisible Hand in his book 'An Enquiry into the nature and the causes of wealth of nation' in 1776.

Impact of change in demand 

• Demand ↑ → Price ↑ & Quantity ↑ 

• Demand ↓ → Price ↓ & Quantity ↓

Impact of change in Supply 

• Supply ↑  → Price ↓ but Quantity  ↑ 

• Supply ↑ → Price ↑  but Quantity ↓

Note - Quantity demanded (Q) and Demand (D) are different terms. Demand depends on the relation between Quantity demanded and Price according the the law of demand. 

Law of demand 

• Price ↓ → Quantity demanded ↑ (i.e., negative relationship)
• Demand ↑ → Price ↑ (i.e., positive relationship)

Impact of change in quantity demanded -

Impact of change in demand

Previous Article - MDGs and SDGs

Next Article - Market Exchange Rate & PPP

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Note - This is my Vision IAS Notes (Vision IAS Class Notes) and Ashutosh Pandey Sir's Public Administration Class notes. I've also added some of the information on my own. 

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