CSEET - Demand and supply brief notes

Demand

• Meaning: Desire to buy goods/services with willingness to pay.

• Law of Demand: When price falls → demand rises; when price rises → demand falls (ceteris paribus).

• Assumptions: No change in income, preferences, fashion, related goods, government policy, etc.

• Exceptions: Giffen goods (inferior goods like bread, rice), snob appeal goods, speculation, psychological bias.

  

Supply

• Meaning: Quantity producers are willing to sell at given prices.

• Law of Supply: Price ↑ → supply ↑; Price ↓ → supply ↓ (ceteris paribus).

• Equilibrium Price: Point where demand = supply.

  

Elasticity of Demand

• Price Elasticity: Responsiveness of demand to price change.

  • Perfectly Elastic (Ep = ∞), Perfectly Inelastic (Ep = 0), Relatively Elastic (Ep > 1), Relatively Inelastic (Ep < 1), Unitary (Ep = 1).

• Factors: Substitutes, necessity, habits, multiple uses, postponement, nature of goods.

• Income Elasticity: Change in demand due to income change (positive, negative, zero, unitary, >1).

• Cross Elasticity: Change in demand of one good due to price change in another (substitutes/complements).

  

Changes in Demand

• Increase/Decrease: Shift in demand curve due to factors other than price.

• Expansion/Contraction: Movement along demand curve due to price change.

Forms of Market Competition

1. Perfect Competition – Many sellers, homogeneous products, free entry/exit.

   

2. Monopolistic Competition – Many sellers, differentiated products (e.g., toothpaste, cereals).

   

3. Oligopoly – Few sellers dominate (competition/collusion, barriers to entry).

   

4. Monopoly – Single seller controls market and price.

   

5. Duopoly – Market controlled by two firms (rare).

   

Elasticity of Supply

• Types: Perfectly Inelastic, Relatively Inelastic, Unitary, Relatively Elastic, Perfectly Elastic.

• Factors: Price of good, future expectations, cost conditions, nature of good, time period for adjustment.