What are The 5 Basic Economic Problems and solutions?

1. What to Produce?
Ans: No country can produce all the goods because there are limited resources available to them.
Therefore, a choice has to be made between the different types of commodities that a country can
produce with its available resources. For instance, a farmer who has a piece of land can produce
either wheat or rice. Similarly, the government of a country needs to decide where to allocate its
resources whether in consumer goods or defence goods or both, if both, then what will be the
proportion of allocation of resources in the two categories of goods.

2. How to Produce?
Ans: This economic problem is concerned with the technique of producing a commodity. This
problem arises only when there is more than one way of manufacturing goods. The techniques of
production can be classified into two broad categories:
 Labour Intensive techniques (extensive use of labour)
 Capital Intensive techniques (extensive use of machinery)
Labour intensive technique is known to promote employment, whereas capital intensive
techniques promote growth and efficiency in manufacturing.

3. For whom to Produce?

Ans: All wants of people in a society can not be satisfied. So, a decision has to be made on who
should get the amount of total output of goods and services produced. Society decides on the
amount of luxury and standard goods that have to be produced. The further distribution of these
goods directly relates to the purchasing power of the economy.

Is economics a positive science or normative?/Major branch of economics?

What is Positive economics?
Positive economics is the objective analysis of economics. It is an investigative process that helps
understand what is currently happening or has happened in an economy to form the basis of
predictions for the future. This part of economics relies on factual data based on which verifiable
conclusions can be drawn. It talks about facts that can be either be proven or disapproved.It looks
at the fact-based economic relationships and behavioral finance and the cause-effect interaction
for developing economic theories. Through positive economic theory, policymakers can
implement normative value judgments by supporting statements with facts and analysis of
behavioral relationships. This study of economic behavior profits making judgments on economic
value.
What is Normative Economics?
Normative economics is not based on facts and is rather based on the ideological principle
that expresses the conditions of the economy whenever public policy changes are
made. It is not based on facts and is rather based on the ideological principle that
expresses the conditions of the economy whenever public policy changes are made.
This is a study related to what should happen instead of what is currently happening. This
part of economics deals with normative statements and focuses on the idea of fairness.
Since it is an opinion-based analysis, it is affected by the value judgments. In normative
economics, outcomes are assessed as either good or bad. Due to the nature of this part
of economics, there is no method to prove or disprove an opinion.

Difference between Positive and Normative Economics?

Parameters Positive Economics Normative Economics

Provides solutions to economic
Purpose Describes different economic phenomena
issues based on values
Relies on past and present data for Deals with fairness and value of
Definition
determining future situations economic principles
Discusses Cause-and-effect relationships Opinions and judgments
Nature Factual and descriptive Prescriptive
Uses data and facts for behavioral Makes assumptions based on
Action
assessment opinions
Types of
Objective Subjective
Arguments
Verifiable Yes No

What Are The Differences Between Microeconomics and Macroeconomics?

Basis Microeconomics Macroeconomics
Studies the behaviour of the entire
Studies the behaviour of individual
Definition economy based on aggregate demand and
consumers and firms.
factors.
Deals in Individual economic variables Aggregate economic variables
Applied to operational and internal Applicable to the environment and external
Applications
issues of business. issues of business.
Tools Demand and Supply Aggregate Demand and Aggregate Supply
Every macroeconomic variable is
Assumption Every microeconomic variable is constant.
constant.
Product pricing, demand, supply, Employment, general price level, national
Scope production, factor pricing, income, labour economics, distribution,
consumption, economic welfare, etc. money, etc.
Maintains stability in the general price level
Determines product prices through
Significance and resolves problems like inflation,
factor prices in the economy.
deflation, poverty, and unemployment.
Suffers from the ‘Fallacy of Composition’
Based on unrealistic assumptions
Limitations (what is true for the whole may not be true
(e.g., 100% employment).
for individuals).
What is Microeconomics?
Microeconomics focuses on the behaviour of individuals and firms in decision-making
related to the allocation of scarce resources. This branch of economics focuses on the
study of individual markets, industries, and sectors. The aim of this branch is to study
individual labour markets, the theory of firms, and consumer behaviour. Key factors of
microeconomics include production theory, labour economics, production cost and
demand, supply and equilibrium. Microeconomics involves the following:
 Conditions under which free markets lead to the desirable allocation
 Effects of economic policies on the microeconomic level
 Supply and demand in the individual markets
 Individual consumer behaviour and labour markets
 Externalities that arise from production and consumption

What is Macroeconomics?
Macroeconomics studies the performance of economies. It is the study of inflation, changes in
economic output, balance of payments and interest and foreign exchange rates. It is the study of
the behaviour of the national and regional economy as a whole. It focuses on events such as total
goods and services produced, unemployment, national income and factors that determine the
price.
Macroeconomics is concerned with the aggregate outcomes of decisions made by firms and
consumers. It utilises measures such as unemployment rates, consumer price index and gross
domestic product to study the major setbacks of micro-level decisions.
What is an economic theory?

An economic theory is a set of ideas and principles that outline how different economies function.
Depending on their particular role, an economist may employ theories for different purposes. For
instance, some theories aim to describe particular economic phenomena, such as inflation or supply
and demand, and why they occur.

Other economic theories may provide a framework of thought that allows economists to analyze,
interpret and predict the behavior of financial markets, industries and governments. Often, though,
economists apply theories to the issues or occurrences they observe to glean useful insight, provide
explanations and generate potential solutions to problems. There's an extensive collection of
theories available to professionals when analyzing economic activity.such as
1. Supply and demand
2. Classical economics
3.Keynesian economics
4.Malthusian economics
5.Market socialism
6. Laissez-faire capitalism
What Is Opportunity Cost?

Opportunity cost is a fundamental concept in economics and business that helps individuals and
organizations make optimal choices by evaluating what they must sacrifice when deciding between
alternatives. When you make a decision, you forgo the potential benefits of other options. The
value of the next best alternative that is not chosen is called the opportunity cost.

Opportunity cost refers to the benefit lost from the option you did not select. It is not recorded in
accounting profits or external financial reports, but it plays a crucial role in assessing and
improving decision-making. Considering opportunity costs helps students, businesses, and
investors select alternatives that offer the maximum potential benefit.

For example, if a manufacturer must choose between building a new plant in Location A or
Location B, the opportunity cost is the potential gain lost from not choosing the best alternative
site.

Formula for Calculating Opportunity Cost

Calculating opportunity cost involves comparing the expected returns of two options. The basic
formula is:

Suppose a business has two options: invest in the stock market or purchase new equipment. If the
stock market is expected to yield 10% and the equipment is expected to yield 8%, choosing
equipment means the opportunity cost is the 2% higher return not earned by investing in stocks.

Examples of Opportunity Cost

Opportunity cost appears in daily life and business. An often-cited example is a 2010 transaction
where someone exchanged 10,000 bitcoins for two pizzas, worth about $41 at that time. If the
bitcoins had been held, they would have grown to be worth hundreds of millions later—the
opportunity cost was enormous.

In investments, if you consistently put money in low-yield bonds rather than a combination of
bonds and stocks, the opportunity cost is the extra return you would have received from the more
balanced or higher-risk portfolio.
What is Production?
Production is the process of making or manufacturing goods and products from raw materials or
components. In other words, production takes inputs and uses them to create an output which is fit for
consumption – a good or product which has value to an end-user or customer.

According to Bates and Parkinson:

“Production is the organised activity of transforming resources into finished pro ducts in the
form of goods and services; the objective of production is to satisfy the demand for such
transformed resources”.

According to J. R. Hicks:

“Production is any activity directed to the satisfaction of other peoples’ wants through
exchange”. This definition makes it clear that, in economics, we do not treat the mere
making of things as production. What is made must be designed to satisfy wants.

Factors of Production – definition and explanation

Factors of production refer to the different elements that are used in producing
goods and services.Factors of production are inputs into the productive process.

The four main factors of production are:

1. Land – this is raw materials available from mining, fishing, agriculture

2. Capital – This is a manufactured item used to aid production, for
example, machines, factories and computers
 3. Labour – Human workers who are involved in producing the good.
4. Entrepreneur – the individual or business who take the initiative to set
up a business and employ different factors of production (labour, capital
and entrepreneur)
Other potential factors of production

5. Knowledge – human capital – the skills and ability of workers. For

example, a doctor who spent 15 years studying medicine is more productive
than non-skilled workers.
6. State of technology – some schools of economics consider the state of
technological development to be a factor of production. It will influence the
effectiveness of capital investment.
7. Social capital – the coherence of society. Is there trust and working legal
systems which enable entrepreneurs to have greater faith in setting up a
business
8. Cultural heritage – if there is a strong tradition of investment and
business, it is easier to replicate past business models.
Examples of factors of production

Land – raw materials

 Oil
 Coal
 Fish
 Agricultural produce – fruit, vegetables, meat
 Commercial real estate – land to build factories
Labour (human resources)
 Workers – full time, part-time, temporary, permanent
 Management
Capital (man-made resources)
 Machines
 Tractors, spades
 Computers, Phone
 Office block
 Factory, Assembly line
 Public infrastructure – communication and roads needed to transport
goods across the country.
Entrepreneurs (individuals who bring factors of production together
 Self-employed
 People who start up businesses – Anita Roddick, Bill Gates, Richard
Branson
 Finance – Entrepreneurs needs access to money – either savings or loans
from banks to get started.
What Is the Production Possibility Frontier/curve (PPF) or PPC?

The production possibility frontier (PPF) is a curve on a graph that illustrates the possible
quantities of two products that can be produced if both depend on the same finite resource for
their manufacture. The PPF is also referred to as the production possibility curve.

What Are the 3 Assumptions of the Production Possiblity Frontier?

There are four common assumptions in the model:

1. The economy is assumed to have only two goods that represent the market.
2. The supply of resources is fixed or constant.
3. Technology and techniques remain constant.
4. All resources are efficiently and fully used.
What Is the Importance of the Production Possibility Frontier?

The PPF demonstrates whether resources are being used efficiently and fully when everything else
remains constant. Thus, the variables can be changed to see how the curve reacts, letting you observe
different outcomes.

The Production Possibility Curve (PPC) is a diagram that shows the most an economy can
produce of two goods or services with its current resources. It is used to visualize the trade-offs
and opportunity costs present when a country has to choose what to produce.

Assumptions in the PPC

As with any economic model, the PPC is a simplified version of real economics, and has a few
assumptions:
 Fixed resources: The quality and quantity of the country's resources are fixed in place.
This also means the state of technology remains the same.
 Interchangeable resources: One can always give up one of the alternatives to gain more
of the other alternative, at no other cost.
  Only 2 alternatives: The PPC can only show the relationship between 2 resources,
although the real economy is much more complicated.

How the shape of PPC is affected by increasing opportunity cost?

Increasing vs. constant opportunity cost (AO2, AO4)

There are 2 main ways the PPC can be drawn, either with a constant or an increasing
opportunity cost:

Features of the model (AO2)

The PPC can be used to explain various economic concepts.
 Opportunity cost: The PPC shows that choosing more of one good results in less of
another.
 Scarcity: Not all combinations of resources can be produced simultaneously due to
scarcity.
 Choice: Because of this scarcity, choices have to be made on where to position ourselves
on the PPC.
 Unemployment of resources: Points inside the PPC indicate unemployment or
inefficient use of resources, where the economy is not producing at its full potential.
 Efficiency: The PPC shows efficiency when production is on the curve, meaning
resources are fully and effectively utilized.

What is a Commodity?
A commodity is a basic, raw material or primary agricultural product that can be bought and sold in bulk.
Commodities are typically uniform in quality and are often interchangeable with other goods of the same
type, regardless of who produces them. This means that a commodity is largely defined by its utility rather
than brand or differentiation.
Commodities are generally classified into two types:

1. Hard Commodities: These include natural resources that are mined or extracted, such as oil,
gold, copper, and natural gas.
2. Soft Commodities: These are agricultural products or livestock that are grown or raised, such as
wheat, coffee, cotton, cattle, and sugar.

The value of a commodity is typically determined by market forces like supply and demand, geopolitical
factors, weather conditions, and global economic trends. Because commodities are standardized, they
can be traded on exchanges like the Chicago Mercantile Exchange (CME) or the New York Mercantile
Exchange (NYMEX).

What is a Product?
A product, on the other hand, refers to any good or item that is created or manufactured, often through a
process of adding value or transforming raw materials. Products are typically finished goods that have
undergone production and are ready for consumption or use.
Products can be:

1. Consumer Goods: These are products designed for end consumers, such as electronics,
clothing, furniture, and food items.
2. Industrial Goods: These are products intended for use in the production of other goods, such as
machinery, tools, and chemicals used in manufacturing.

Unlike commodities, products are often differentiated by brand, design, quality, and marketing. Companies
invest heavily in branding, packaging, and customer experience to distinguish their products in competitive
markets. This differentiation makes products unique, even if they are made from the same raw materials
as other similar items.

Utility: Meaning, Characteristics and Types | Economics

Meaning of Utility:
The simple meaning of ‘utility’ is ‘usefulness’. In economics utility is the capacity of a
commodity to satisfy human wants.

Utility is the quality in goods to satisfy human wants. Thus, it is said that “Wants satisfying
capacity of goods or services is called Utility.”
In this way utility is measured in terms of money and it is relative. There is difference between
utility and usefulness. A useful commodity may not here utility of goods depend upon the
intensity of wants.

Utility depends upon the intensity of want. When a want is unsatisfied or more intense, there
is a greater urge to demand a particular commodity which satisfies a given want. In modern
time utility has been called as ‘expected satisfaction.’ Expected satisfaction may be less or
equal to or more than the real satisfaction.

Definition of Utility:

1. According to Prof. Waugh:

“Utility is the power of commodity to satisfy human wants.”

2. According to Fraser:

“On the whole in recent years the wider definition is preferred and utility is identified, with
desireness rather than with satisfyingness.”

The following are the important characteristic features of utility:

1. Utility has no Ethical or Moral Significance:

A commodity which satisfies any type of want, whether moral or immoral, socially
desirable or undesirable, has utility, i.e., a knife has utility as a household appliance to a
housewife, but it has also a utility to a killer for stabbing some body.

2. Utility is Psychological:

Utility of a commodity depends on a consumer’s mental attitude and assessment regarding

its power to satisfy his particular want. Thus, utility of a commodity may differ from person
to person. Psychologically, every consumer has his likes and dislikes and everyone
determines his own level of satisfaction.

For instance:

A consumer who is fond of apples may find a high utility in apples in comparison to the
consumer who has no liking for apples. Similarly a strictly vegetarian person has no utility
for mutton or chicken.
3. Utility is always Individual and Relative:

Utility of a commodity varies in different situations in relation to time and place. Even the
same consumer may derive a higher or lower utility for the same commodity at different
times and different places. For example—a person may find more utility in woolen clothes
during the winter than in summer or at Kashmir than at Mumbai.

4. Utility is not Necessarily Equated with Usefulness:

Utility simply means the ability to satisfy a want. A commodity may have utility but it may
not be useful to the consumer. For instance—A cigarette has utility to the smoker but it is
injurious to his health. However, demand for a commodity depends on its utility r ather than
its usefulness. Thus many commodities like opium liquor, cigarettes etc. have demand
because of utility, even though, they are harmful to human beings.

5. Utility cannot be Measured Objectively:

Utility being a subjective phenomenon or feeling of a consumer cannot be expressed in

numerical terms. So utility cannot be measured cardinally or numerically. It cannot be
measured directly in a precise manner. Professor Marshall has however, unrealistically
assumed cardinal measurement of utility in his analysis of demand.

6. Utility Depends on the Intensity of Want:

Utility is the function of intensity of want. A want which is unsatisfied and greatly intense
will imply a high utility for the commodity concerned to a person. But when a wan is
satisfied in the process of consumption it tends to experience a lesser utility of the
commodity than before. Such an experience is very common and it is described as a
tendency of diminishing utility experienced with an increase in consumption of a
commodity. In other words, the more of a thing we have, the less we want it.

7. Utility is Different from Pleasure:

A commodity may have utility but its consumption may not give any pleasure to the
consumer, e.g., medicine or an injection. An injection or medicinal tablet gives no pleasure,
but it is necessary for the patient.
8. Utility is also Distinct from Satisfaction:

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Utility and satisfaction, both are though inter-related but they have not been considered as
the same in a strict sense.

Different Types of Utility:

In economics, production refers to the creation of utilities in several ways.

Thus, there are following types of utility:

1. Form Utility:

This utility is created by changing the form or shape of the materials. For example —A
cabinet turned out from steel furniture made of wood and so on. Basically, from utility is
created by the manufacturing of goods.

2. Place Utility:

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This utility is created by transporting goods from one place to another. Thus, in marketing
goods from the factory to the market place, place utility is created. Similarly, when food-
grains are shifted from farms to the city market by the grain merchants, place utility is
created.

Transport services are basically involved in the creation of place utility. In re tail trade or
distribution services too, place utility is created. Similarly, fisheries and mining also imply
the creation of place utility. Place utility of a commodity is always more in an area of
scarcity than in an area of scarcity than in an area of abundance e.g., Kashmir apples are
more popular and fetch higher prices in Pune than in Srinagar on account of such place
utility

3. Time Utility:

Storing, hoarding and preserving certain goods over a period of time may lead to the
creation of time utility for such goods e.g., by hoarding or storing food-grains at the time of
a bumper harvest and releasing their stocks for sale at the time of scarcity, traders derive the
advantage of time utility and thereby fetch higher prices for food-grains. Utility of a
commodity is always more at the time of scarcity. Trading essentially involves the creation
of time utility.

4. Service Utility:

This utility is created in rendering personal services to the customers by various

professionals, such as lawyers, doctors, teachers, bankers, actors etc.

Can Utility be Measured?

Utility is a psychological concept. This is different for different people. Therefore, it cannot
be measured directly. Professor Marshall has said that “Utility can be measured and its
measuring rod is ‘money. The price which we are ready to pay for an article is practically its
price. Nobody will be prepared to pay more than the utility which we derive from the
article.

For example:

If I am ready to pay Rs. 1500 for a watch and Rs. 2,000 for a Radio. Then I can say that I
derive utility from that watch up to the value of Rs. 1500; and from Radio up to the value of
Rs. 2,000. “The inference which we can draw from the above example is that the price
which we pay for any article is the utility which we derive from that article.” But Prof.
Hicks, Allen and Pareto have not supported Marshall’s view of measuring utility.

They are of this opinion that measuring of utility is not possible because of the
following reasons:

(i) Utility is personal, psychological and abstract view which cannot be measured like
goods.

(ii) Utility is different for different people. Utility is always changeable and it changes
according to time and place. Therefore, it is difficult to measure such thing who is of
changeable nature.

(iii) Further, measuring material ‘money is not static. Value of money always changes,
therefore, correct measurement is not possible.

Kinds of Utility:

Utility are of three kinds:

(i) Marginal Utility,

(ii) Total Utility,

(iii) Average Utility

(i) Marginal Utility:

Definition:

Marginal utility is the utility derived from the last or marginal unit of consumption. It refers
to the additional utility derived from an extra unit of the given commodity purchased,
acquired or consumed by the consumer.

It is the net addition to total utility made by the utility of the additional or extra units of the
commodity in its total stock. It has been said—as the last unit in the given total stock of a
commodity.

According to Prof. Boulding—”The marginal utility of any quantity of a commodity is the

increase in total utility which results from a unit increase in its consumption.”

For example:

Suppose Mr. Shanker is consuming bread and he takes five breads. By taking first unit he
derives utility up to 20; second unit 16; third unit 12; fourth unit 8 and from fifth 2. In this
example the marginal unit is fifth bread and the marginal utility derived is 2. If we will
consume only four bread then the marginal unit will be fourth bread and utility will be 8.

Kinds of Marginal Utility—Marginal utility is of three kinds:

(i) Positive Marginal Utility,

(ii) Zero Marginal Utility,

(iii) Negative Marginal Utility.

It is a matter of general experience that if a man is consuming a particular goods, then

receiving of next unit of goods reduces the utilities of the goods and ultimately a situation
comes when the utility given by the goods become zero and if the use of the goods still
continues, then the next unit will give dis-utility. In other words it can be said that we will
derive “negative utility”.

This can be studied better by the following table:

From the table given above it is clear that up to the consumption of the fifth bread we
receive positive utility; 6th unit is the unit of full satisfaction i.e., Utility derive from that
unit is zero. From 7th unit the utility received will be negative utility. The table can be
represented in shape of diagram as follows: In diagram No. 1 OX axis (line) shows unit of
bread and OY line shows the Marginal Utility received. From the figure it is clear that from
the first unit of bread utility received are 20 which has been shown on the top of the line.

Similarly 2, 3, 4, 5 Unit of bread’s utility is 16, 12, 8, 4 respectively All these have been
shown on OX line which shows positive marginal utility. Utility of the sixth bread is zero
and that of the seventh bread is negative and negative rectangle has been shown below OX
line.

Zero Utility:

When the consumption of a unit of a commodity makes no addition to the total utility, then
it is the point of Zero Utility. In our table the total utility, after the 6th unit is consumed.
This is the point of Zero Utility. It is thus seen that the total utility is maximum when the
Marginal Utility is zero.
Negative Utility:

Negative Utility is that utility where if the consumption of a commodity is carried to excess,
then instead of giving any satisfaction, it may cause dis-satisfaction. The utility is such
cases is negative. In the table given above the marginal utility of the 7th unit is negative.

(ii) Total Utility:

Total Utility is the utility from all units of consumption. According to Mayers —”Total
Utility is the sum of the marginal utilities associated with the consumption of the successive
units.”

For example:

Suppose, a man consumes five breads at a time. He derives from first bread 20 units of
satisfaction from 16, from third 12, from fourth 8 and from fifth 4 i.e., total 60 units.

This can be shown by the following table:

(iii) Average Utility:

Average Utility is that utility in which the total unit of consumption of goods is divided by
number of Total Units. The Quotient is known as Average Utility. For example—If the
Total Utility of 4 bread is 40, then the average utility of 3 bread will be 12 if the Total
Utility of 3 bread is 36 i.e., (36 ÷ 3 = 12).

The following table will explain the point clearly:

It is clear from the above table that by the increasing use of any article Marginal and
Average Utility reduces gradually and Total Utility increases only up to that point where the
Marginal Utility comes to zero.

Relation between Total Utility and Marginal Utility:

There is a close relationship between Total Utility and Marginal Utility. As there is increase
in the unit of a particular commodity, the Marginal Utility goes on diminishing and Total
Utility goes on increasing. Total Utility goes on increasing up to that extent till the Marginal
Utility becomes Zero. When Marginal Utility is zero Total Utility is maximum.

After Zero Marginal Utility comes to negative and the result is that Total Utility starts
reducing relationship between Total Utility and Marginal Utility can be started as
follows:

(i) When Marginal Utility is reducing, the Total Utility will increase so long Marginal
Utility does not become zero.

(ii) When Marginal Utility becomes zero; Total Utility will be maximum.

(iii) After zero when Marginal Utility is negative then there is reduction in Total Utility.

Relationship between Marginal Utility and Total Utility can be studied from the
following:
From the above table it is clear that up to fourth bread Marginal Utility is positive and there
is no regular increase in the Total Utility. And on fifth bread the Marginal Utility is zero and
on this point the increase in Total Utility stops. This is point of safety. As Prof. Bounding
has said that “Point of full satisfaction and point of full safety is that point where
consumption increases but there is no increase in Total Utility.” If after fifth bread, extra
bread is consumed then there will be dis-utility and Marginal Utility will be negative. Sixth
and seventh bread shows dis-utility.

The relationship between Marginal Utility and Total Utility will be shown by diagram
as follows:

In both the diagrams OX line shows bread. In diagram No. 1 OY line shows Marginal
Utility and is diagram No. 2 OY line shows Total Utility. As the number of bread increases
Marginal Utility goes on diminishing and Total Utility goes on increasing—To remember:

(1) Marginal Utility goes on diminishing with the consumption of every additional unit of
bread.

(2) Total Utility goes on increasing with the consumption of every additional unit but at a
diminishing rate.
(3) Marginal Utility is equal to the increase in the Total Utility. Total Utility is the sum total
of the Marginal Utilities derived from all the units consumed.

(4) When Marginal Utility becomes 0, total utility does not increase.

(5) When Marginal Utility becomes negative, Total Utility decreases.

(6) Increase in Total Utility depends on Marginal Utility.

(7) Since Marginal Utility diminishes, Total Utility increases at a diminishing rate.

(8) When Marginal Utility is Zero, Total Utility is maximum.

(9) When Marginal Utility is negative, Total Utility declines.

Wants: Characteristics and Classification of Human Wants

Definition:
It is very difficult to define human wants within few words. All of us want to live. For this
reason, we need food, clothing and shelter.

Human desire for better and ever better living, the desire for change, increasing knowledge,
human progress etc. have led to emergence and growth of more and newer wants.

Thus wants have been increasing because of the addition of more and more wants as also
because of rise in population and new inventions and discoveries. Therefore, human wants
are ‘ever growing and never ending’.

Human wants have grown for two basic reasons:

(i) Desire for better living due to introduction of new things;

(ii) Rise in population growth.

These are two main factors responsible for the growth of human wants.

Characteristics of Human Wants:

There are several characteristics of human wants.

These are listed below:

(i) Wants are repeated:

Several human wants occur again and again during the same day. We want food during
breakfast, lunch, dinner etc. However, we want medicine at the time we feel sick. Therefore,
some of our wants are reoccurred many times during a day, while some human wants only
repeated after a long time. In some cases, human wants are only occasional.

(ii) Wants may differ with age:

Human wants are changing according to the age. A child wants toys, whereas an adult wants
a motorbike. A student wants to go to school. A grown-up wants a job and a secured life.

(iii) Wants may differ with gender:

Wants of a boy and a girl are different. A girl wants to dance, whereas a boy wants to play.
A gentleman wants shirts, pants, ties etc. However, a lady wants sarees and salwar suits.
Thus, both men and women want different goods according to their needs.

(iv) Wants may differ with preferences:

Human wants are also changing according to tastes and preferences A twin sisters may
wants different types of foods and dresses. Some persons want spicy foods while some
others want very simple non-spicy foods. Wants may also change according to the habits of
the people.

(v) Wants may differ with climate:

A same person wants woolen clothes during winter, cotton clothes in summer and raincoats
at the time of rainy season. People from mountain or hilly areas want room-heater, but
plain- land people demand for AC machine.

(vi) Wants may differ with culture:

A Bengali wants rice and fish, a Punjabi wants roti and dal, a Tamil wants iddli and dosa
etc. in their food. An European wants ‘coat, pant & tie’, whereas an Indian wants ‘kurta and
pajama’. Thus, human wants are varying with culture.

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(vii) Wants may differ with health:

A healthy person wants sufficient good food. However, a sick or ill person wants proper
medicines.

(vii) Wants Are Unlimited:

Crisis is the mother of civilization. With the passage of time, human wants are increasing.
We may satisfy some of our wants for time being, but they may also reoccur. Moreover,
there are so many wants which will never be satisfied during our lifetime.

Classification of Wants:

Wants can be classified in following ways:

(i) Economic and Non-Economic Wants:

The wants which cannot be satisfied by such goods and services that can be bought are
known as economic wants. For example, want for food, want for book, want for dress etc.
To satisfy these wants, a consumer has to spend money.

The wants which cannot be satisfied by making monetary payment for them, are known as
non- economic want. We want love and affection of our parents, relatives, neighbours etc.
We want stable government. We also wants international peace and amity. We want
universal brotherhood.

ADVERTISEMENTS:

(ii) Individual Wants and Collective Wants:

Personal or individual wants refer to those wants which are only demanded by a single
person or an individual. For example, Sachin wants a cricket bat, Baichug Bhutia wants a
football, Leander Paes wants tennis-racket etc. These are the personal wants. ‘On the other
hand’ all the things are wanted by us collectively. For example, good government, roads,
hospitals, schools etc. are collective wants or social wants. Again, we all want India’s win
either in a football match or in a cricket match.

(iii) Necessity, Comfort and Luxury:

Human wants are varying in nature. Want for food, clothing, shelter are the basic necessities
of human beings. We want books, pens, pencils, medicines, fuel and cooking gas etc. Ail
these are basic necessities of human life.

On several occasions, we want to make our life comfortable. We want washing machine,
AC- machine, pressure cooker, mixer, geyser, motor cycle, mobile phone etc. for our little
comfort. These wants are classified as comforts.

There are other wants which are meant for pleasure. Wants for Plasma-TV, AC-car, well
furnished house, computers to play games, travel by air etc. All these wants are called
luxuries. However, what are considered as comforts today may become necessities in near
future.

Chapter-2
Demand
Define Demand:
Demand refers to the quantity of a commodity the customer is willing and capable to purchase, at any given
time and at each possible price. The above definition highlights essential components of demand: (i)
Quantity of the commodity (ii) Willingness to buy (iii) Price of the commodity (iv) Period of time. Demand
for a commodity can be expressed with respect to the individual (Individual Demand) or the entire market
(Market Demand).
The quantity of a good or service that a consumer is willing and capable to purchase at each possible price
during a given time period is referred to as an Individual Demand. However, the quantity of goods or
services that all consumers are willing and capable to purchase at every possible price within a given time
period is referred to as Market Demand.

Definition of demand function:

The relationship between the quantity demanded of a particular commodity and the factors
influencing it is expressed by the Demand Function. It can be with respect to an individual
customer (Individual Demand Function) or all consumers in the market (Market Demand
Function).
1. Individual Demand Function
The functional relationship between the individual quantity demanded of a particular commodity
and the factors influencing it is defined as the Individual Demand Function.
It is expressed as:
Dx = f (Px, Pr, Y, T, F)
Where,
Dx= Demand for Commodity x,
Px= Price of the given Commodity x,
Pr = Prices of Related Goods,
Y = Income of the Consumer,
T = Tastes and Preferences, and
F = Expectation of Change in Price in the future.
2. Market Demand Function
The functional relationship between the market demand of a particular commodity and the factors
influencing it is defined as the Market Demand Function. As earlier stated, market demand is
influenced by all of the factors that influence individual demand. In addition to those factors, it is
also influenced by population size and composition, season and weather, and income distribution.
It is expressed as:
Dx = f (Px, Pr, Y, T, F, Po, S, D)
Where,
Dx= Demand for Commodity x,
Px= Price of the given Commodity x,
Pr = Prices of Related Goods,
Y = Income of the Consumer,
T = Tastes and Preferences, and
F = Expectation of Change in Price in the future.
Po= Size and Composition of the population,
S = Season and Weather, and
D = Distribution of Income.
Defination of Law of Demand:
Law of Demand states that there is an inverse relationship between the price and quantity demanded of
a commodity, keeping other factors constant or ceteris paribus. It is also known as the First Law of
Purchase.

There are several other factors besides the price of the given commodity that affect the quantity
demanded of a commodity. Therefore, in order to understand the separate influence of one factor
affecting the demand, it is essential that the other factors are kept constant. Hence, under the Law of
Demand, it is assumed that other factors are constant.
P oints
to Remember:
Prof Samuelson- Law of demand states that people will buy more at lower prices and buy less at higher
prices,if other things remain the same.

Prof Marshall- The law of demand states that a mount demanded increases with a fall in price and
diminidhes when price increases.

Ferguson- According to the law of demand, the quantity demanded varies inversely with price

Assumptions of Law of Demand

 The assumptions on which the Law of Demand is based are as follows:

 The price of substitute goods does not change.
 The price of complementary goods also remains constant.
 The income of the consumer does not change.
 Tastes and preferences of the consumers remain the same.
 People do not expect the future price of the commodity to change.
 Graphical Presentation of Law of Demand
 Let's take an example to understand the concept of the Law of Demand better.

Draw demand curve from demand schedule?

Price (in ₹) Quantity Demanded

4 2

3 4

2 6
Price (in ₹) Quantity Demanded

1 8

The above table clearly shows that as the price of the commodity decreases, its quantity demanded
increases. Also, the demand curve DD is sloping downwards from left to right, which means that there is
an inverse relationship between the price and quantity demanded of the commodity.

Reasons for Law of Demand/Reasons for downward sloping of demand curve?

A consumer buys more of a commodity when its price is lower than a higher price because of the following
reasons:

1. Law of Diminishing Marginal Utility: The Law of Diminishing Marginal Utility states that as more and
more units of a commodity is consumed, the utility derived by the consumer from each successive unit
keeps decreasing. It means that the demand for a commodity depends on its utility.

Therefore, if a consumer gets more satisfaction from a commodity, he/she will pay more for it because of
which the consumer will not be prepared to pay the same price for extra units of that commodity. Hence,
the consumer will buy more of the commodity only when its price falls.

2. Substitution Effect: Substituting one commodity in place of another commodity when the former
becomes relatively cheaper is known as the substitution effect. In other words, when the price of a
commodity (let's say coffee) falls, it becomes relatively cheaper than its substitute (let's say tea), assuming
that the price of the substitute (tea) does not change because of which the demand for the given
commodity (coffee) increases.

3. Income Effect: When the real income of the consumer changes because of the change in the price of
the given commodity, there is an effect on its demand. This effect on demand is known as Income Effect.
In other words, when there is a fall in the price of the given commodity, it increases the purchasing power
of the consumer, resulting in an increase in the ability of the consumer to buy more of it.

For example, suppose Sayeba's pocket money is ₹100, and she buys 10 ice-creams for ₹10 each from it.
Now, if the price of the ice cream falls to ₹5 each, it will increase her purchasing power, and she can buy
20 ice-creams from her pocket money.

Price Effect is the combined effect of Income Effect and Substitution Effect (Price Effect = Substitution
Effect + Income Effect).

4. Additional Customers: When the price of a commodity falls, various new customers who could not
purchase the commodity earlier due to its high price are now in a position to buy it. Besides new
customers, the existing or old customers of the commodity will also start demanding more of the
commodity because of the fall in price.

For example, if the price of pizza falls from ₹200 to ₹150, then many new customers who were not in a
position to afford it earlier can now purchase it because of the fall in price. Also, the existing customers
can now demand more pizza, resulting in an increase in its total demand.

5: Different Uses: Some commodities have different uses, among which some of them are more
important, and the rest are less important. When the price of such commodities increases, consumers
restrict its use to the most important purposes, increasing its demand for those purposes, and the demand
for less important uses of the commodity gets reduced. However, when the price of the commodity
reduces, consumers will use it for every purpose, whether it is important or not.

For example, Milk has various uses such as for drinking, making cheese, butter, sweets, etc. If the price of
Ghee increases, then the consumers will restrict their use to the important purpose of drinking.

Exceptions to Law of Demand/Explain law of demand with exceptions/limitations?

1. Giffen Goods: The special kind of inferior goods on which the consumers spend a big part of their
income are known as Giffen Goods. The demand for these goods increases with an increase in price and
falls with a decrease in price. This phenomenon was initially observed by Sir Robert Giffen and is popularly
known as Giffen's Paradox.

For example, rice is an inferior good and wheat is a normal good. Hence, if the price of rice falls, the
consumer will spend less on rice and will start buying more wheat.

2. Fear of Shortage: If the consumers expect that a commodity will become scarce in the near future, they
will start buying more of it in the present, even if the price of the commodity rises because of the fear of
its shortage and rise in its price in the future.

For example, in the initial period of COVID, consumers demanded more of the necessity goods like wheat,
pulses, etc., even at a higher price due to their fear of general insecurity and shortage in the near future.

3. Status Symbol or Goods of Ostentation: Another exception to the law of demand is the goods that are
used as status symbols by the people.
For example, people buy goods like antique paintings because of the status symbol they want to maintain.
They demand antique paintings only because their price is high. It means that if the price of antique
paintings reduces, then the consumers will no longer see it as a status symbol and will reduce its demand.

4. Ignorance: Sometimes consumers are unaware of the prevailing price of a good in the market. In such
cases, they buy more of a commodity, even at a higher price.

5. Necessities of Life: The commodities which are necessary for human life have more demand no matter
whether their price reduces or increases. For example, demand for necessity goods like medicines, pulses,
wheat, etc., will increase, even if their price increases.

6. Change in Weather: When there is a change in the weather, demand for some goods changes, even if
their price increases. For example, demand for raincoats in the rainy season increases, even if their price
increases.

7. Fashion-related goods: The goods related to fashion are demanded more, even when their price is
high. For example, if a specific model of Mobile Phone is in fashion, then consumers will buy it, even if its
price increases.

Determinants of Individual Demand/what are the factors of determine the demand?

Or,What are the factors which can shift a demand curve?

0r,Discuss the causes of changes in demand?

The demand for a commodity depends on various factors. These factors are as follows:
Price of the given commodity: The most important factor affecting the demand for a commodity is its
price. In general, there is an inverse relationship between the demand and price of a commodity. If the price
of a commodity decreases, the quantity demanded will increase, as more people will be willing and able to
purchase the commodity. However, if the price of a commodity increases, its demand will decrease because
of the fall in consumers' satisfaction levels. For example, if the price of coffee decreases, people who were
not able to afford coffee in the past can now purchase and hence will increase its demand.
Price of the related goods: The demand for a commodity also depends on the change in the price of the
related goods. There are two types of related goods: Substitute goods and Complementary goods.
Substitute Goods: The goods which can be used by a consumer in place of one another to satisfy a
particular want are known as substitute goods. If the price of a substitute good increases, then the demand
for the given commodity will also increase, and vice-versa. For example, a decrease in the price of a
substitute good, tea, will reduce the demand for the given commodity, say coffee.
Complementary Goods: The goods which are used together by a consumer to satisfy a specific want are
known as complementary goods. If the price of a complementary good increases, the demand for the given
commodity will decrease as they are consumed together by the consumer. For example, a decrease in the
price of a complementary good, sugar, will increase the demand for the given commodity (say tea) as the
cost of using both products together will be relatively less.
Income of the consumer: The demand for a commodity also changes with a change in consumer income.
However, the effect of income on the demand of a commodity depends on its nature. There are two types
of goods: normal and inferior.
Normal Goods: These are the goods whose demand increases with the increase in consumer's income. For
example, if a consumer's income rises, he will buy more of the normal goods.
Inferior Goods: These are the goods whose demand decreases with the increase in consumer income. For
example, if the income of a consumer increases, he will no more purchase the inferior goods, hence,
decreasing its demand.

Expectations of change in the price of a commodity in the future: If the consumer expects that the price
of a commodity will increase in the near future, its demand at present will also increase. Hence, there is a
direct relationship between a commodity's expectation of a change in its price in the future and the change
in the commodity's demand at present. For example, if a consumer expects that the price of petrol will
decrease in the future, he will not fill his vehicle's petrol tank at present.
Tastes and preferences: A consumer's tastes and preferences for a commodity directly influence his/her
demand for that commodity. The tastes and preferences of a consumer include customs, tradition, religion,
habit, fashion, etc. For example, if an item of clothing is in trend or fashion, people will be more likely to
purchase that particular clothing, increasing its demand.
Season and weather: The seasonal and weather conditions of a region greatly impact the demand for a
commodity. For example, in places like Himachal, the demand for warm clothes is high as compared to
summer clothes.
Distribution of income: The demand for commodities will be high in countries with equitably distributed
income. However, the demand for commodities will be low if there is uneven income distribution in a
country. Uneven income distribution means either people living in that country are very rich or very poor.
Size and composition of population: The size of a country's population highly affects a commodity's
market demand. If the population of a country increases, the market demand will also increase and vice-
versa. Besides the number of people living in a country, their composition (such as male-female ratio, older
people, youngsters, children, adults, etc.) also affects the market demand. For example, if a country has a
large proportion of children, then the market demand for goods like toys, ice cream, chocolates, etc., will
be more.
Movement along Demand Curve and Shift in Demand Curve?
Demand refers to the quantity of a commodity the customer is willing and capable to purchase, at any given
time and at each possible price. The above definition highlights essential components of demand: (i)
Quantity of the commodity (ii) Willingness to buy (iii) Price of the commodity (iv) Period of time. Quantity
Demanded of a commodity and Demand for a commodity are two different concepts. The former depends
on the change in the price of the commodity; whereas, the latter depends on a change in factors other than
the price of the commodity.
Movement along the Demand Curve
Change in quantity demanded occurs when the quantity demanded of commodity changes due to a change
in its price while the other factors remain constant. It is represented graphically as a movement along the
same demand curve. There are two cases in movement along the same demand curve. It may be either a
downward movement (expansion of demand expansion) or an upward movement (contraction of demand).
The graph below shows the movement of the demand curve DD. OQ is the quantity demanded at OP price.
Changes in price cause the demand curve to move either upward or downward.

Movement along Demand Curve:

Upward Movement: When the price increases from OP to OP2, the quantity demanded decreases from OQ
to OQ2 (also known as the contraction of demand), which results in an upward movement from A to C
along the same demand curve DD.
Downward Movement: In contrast, a decrease in price from OP to OP1 causes a rise in quantity demanded
from OQ to OQ1 (also known as the expansion of demand), which results in a downward movement along
the same demand curve DD from A to B.

Change in Demand (Shift in Demand Curve)

A demand curve is used to show the relationship between a commodity's price and quantity demanded,
assuming that all other factors remain constant. However, sooner or later, other factors will be bound to
change. When one of the other factors changes, the demand curve shifts.
For instance, Assume that the income of the consumer rises. Even though the price of a commodity has not
changed, the consumer's desire for that product may increase. The original demand curve cannot show such
an increase in desire for any product whose price has not changed. It will result in a shift in the demand
curve.
Change in demand occurs when the demand for a commodity changes as a result of a change in a factor
other than the price of the commodity. It is referred to as the shift in the demand curve. There are two cases
in the 'shift in demand curve'. It may be either a rightward shift (increase in demand) or a leftward shift
(decrease in demand).
The graph below shows the shift in demand curve DD. OQ is the quantity demanded at OP price. A
rightward or leftward shift in the demand curve is caused by changes in factors other than the price of the
commodity.

Rightward Shift: The demand curve shifts to the right from DD to D1D1 when demand increases from OQ
to OQ1 (also known as an increase in demand) at the same price as OP. It is also known as Outward Shift,
Forward Shift, or Upward Shift.

Leftward Shift: The demand curve shifts to the left from DD to D2D2 when demand decreases from OQ to
OQ2 (also known as a decrease in demand) at the same price as OP. It is also known as Inward Shift,
Backward Shift, or Downward Shift.

What do you mean by Elasticity of Demand:?

Elasticity of demand refers to the shift in demand for an item or service when a change occurs in
one of the variables that buyers consider as part of their purchase decisions. It’s a relationship
between demand and another variable, such as price, availability of substitutes, advertising
pressure, and customer income.
3Types of Elasticity

There are 3 types of elasticity, categorized by the instigating variable—price, related products,
customer income, and advertising. Formulas for calculating each type of elasticity can be used
for scenario-planning or retrospective analysis, but it’s important to note that customer behavior
is not an exact science and predictions can be difficult.

1. Price Elasticity of Demand (PED)

When customers are highly sensitive to changes in price, there is a high PED. This
means, for example, that if inflation causes prices to increase, customers will reduce the
quantity they purchase by switching, substituting, or skipping. Conversely, it can also
indicate that a reduction in price may spur additional sales. The formula for PED is:

PED = % change in quantity / % change in price

Or
PED = [(Q2 – Q1) / Q1] / [(P2 – P1) / P1]
Q1 = initial quantity of demand
Q2 = new quantity of demand
P1 = initial price
P2 = new price

For an application of this formula in action, see the example section, below.

2. Cross Elasticity of Demand (XED)

Cross elasticity happens when changes if one product’s price prompt changes in demand
for another. The two products must be related, either as complements or substitutes for
each other. When products are substitutes for each other, a rise in the price of one will
usually cause a rise in demand for the other. For example, if coffee prices rise, then
demand for breakfast tea is likely to increase as customers substitute tea for coffee. When
two products are complementary, a rise in the price of one will usually cause a decrease
in the demand for the other. Similarly, if coffee prices rise, demand for coffee creamer
will likely decline as people drink less coffee. XED does not apply to unrelated products,
such as airline tickets and oranges. The formula for XED is:
 XED = % change in quantity for product A / % change in price for product B
Or
XED = [(Q2a – Q1a) / (Q2a + Q1a)] / [(P2b – P1b) / (P2b + P1b)]
Q1a = initial quantity of demand of product A
Q2a = new quantity of demand of product A
P1b = initial price of product B
P2b = new price of product B

3. Income Elasticity of Demand (YED)

YED (with a “Y” because that’s the notation economists use for income) is the relationship
between demand and a customer’s income. As income decreases, quantity of demand tends to
decline, even if all other factors remain the same, including price. YED tends to differ according
to the priority of a product, meaning that what economists refer to as “normal goods,” such as
food, clothes, and other necessities, are likely to be prioritized over luxury items when customers’
income declines. Further, spending on normal goods is more likely to increase first when income
increases, and increase of luxury goods happens on a lag. The formula for YED is:

YED = % change in quantity / % change in income

Or
YED = [(Q2 – Q1) / Q1] / [(Y2 – Y1) / Y1]
Q1 = initial quantity of demand
Q2 = new quantity of demand
Y1 = initial income
Y2 = new income

Explain different types of Price Elasticity of Demand:/Explain terms E=1,E>1,E<1,E=0,E=$?

Perfectly inelastic demand
Perfectly inelastic demand is when demand does not change, regardless of changes in other factors.
Products that are considered a necessity, with no substitutes, are in this zone, such as essential
foods and lifesaving drugs. Perfectly inelastic demand has a PED of zero.

Relatively inelastic demand

Relatively inelastic demand means that it takes large changes in a factor, such as price, to cause a
small change in demand. Gasoline and salt are common examples of relatively inelastic products.
Relatively inelastic demand has a PED of less than one.

Unitary elastic demand

Unitary elastic demand is a special case that arises when the impact on demand is an equal, one-
for-one change compared with another factor. For example, a 10% increase in price causes a 10%
decrease in demand quantity. Unitary elastic demand is mostly a hypothetical concept, since it is
unusual to find a product with such perfect correlation. Unitary elastic demand has a PED of
exactly one.

Relatively elastic demand

Relatively elastic demand means a small change in one factor creates a disproportionately larger change in
demand. For example, if a 5% increase in the price of a streaming service caused a 10% decrease in
subscribers, it would be considered relatively elastic. Most products and services fall into this zone.
Relatively elastic demand has a PED greater than one. Higher values indicate greater elasticity.

Perfectly elastic demand

Perfectly elastic demand is the extreme scenario where demand drops 100% due to changes in
one of the factors. This is relatively rare, since characteristics such as accessibility, brand loyalty,
and quality will often cause some customers to continue to purchase a product. As an example, if
the price of organic bananas goes up at Fred’s Supermarket but not at Barney’s Grocery, under
perfect elasticity of demand no shoppers would purchase the bananas at Fred’s. However, some
customers might decide to pay the higher price to save time and effort, especially if they believe
Fred’s produce is fresher. The result of the PED calculation for perfect elasticity is infinity—
representing the all-or-nothing buying decision.

Calculate elasticity of demand in case of substitute and complementary goods?

The cross elasticity of demand measures how the demand for one good changes in response to a
price change in another good. For substitute goods, this elasticity is positive, meaning an increase
in the price of one good leads to an increase in the demand for the other. Conversely, for
complementary goods, the elasticity is negative because an increase in the price of one good leads
to a decrease in the demand for the other.
Substitute Goods
Positive Cross Elasticity: The demand for substitute goods has a positive cross-price elasticity.
Consumer Behavior: If the price of a good increases, consumers will buy more of its substitute to
satisfy the same need. For example, if the price of coffee increases, the demand for tea may rise.
Competition: Substitute goods are in direct competition in the market.
Complementary Goods
Negative Cross Elasticity: The demand for complementary goods has a negative cross-price
elasticity.
Consumer Behavior: If the price of a good increases, the demand for both that good and its
complement will fall. For instance, an increase in the price of printers could lead to a decrease in
the demand for ink cartridges.
Joint Demand: The demand for complementary goods is often linked, meaning the demand for one
influences the demand for the other.
 Chapter-3
Supply

What Is Supply?

Supply is a fundamental economic concept that describes the quantity of a good or service that
producers are willing to offer to buyers in the marketplace. Supply can relate to the amount
available at a specific price or the amount available across a range of prices when displayed on
a graph. This relates closely to the demand for a good or service at a specific price; All else
being equal, the supply provided by producers will rise if the price rises because all firms look
to maximize profits.
The Law of Supply

The law of supply relates price changes for a product to the quantity supplied. The law of supply
relationship is direct, not inverse. The higher the price, the higher the quantity supplied. Lower
prices mean reduced supply all else being equal.

Higher prices give suppliers an incentive to supply more of the product or commodity, assuming
their costs aren't increasing as much. Lower prices result in a cost squeeze that curbs supply.
Supply slopes are upwardly sloping as a result.

Meaning of Supply Function:

Supply function is a numerical portrayal of the association between the amount expected (quantity
demand) of a product or service, its value, and other related factors, for example, related products
costs and input costs. A supply function has numerous individual dependent variables and
independent variables. A supply equation can be planned by inspecting the connection between
the independent variable and the supply. It can likewise be formed by characterising whether the
relationship is negatively related or positively related. For instance, as a general rule, the market
cost or price and supply are contrarily associated. Then again, supply and innovative improvement
are positively related; for instance, better innovation and technology demonstrate added supply.

The supply function is expressed as, Sx = f (Px , P0 , Pf, St , T, O)

Where:

Sx = Supply of the given commodity x.

Px= Price of the given commodity x.

P0 = Price of other goods.

Pf = Prices of factors of production.

St= State of technology.

T = Taxation policy.

O = Objective of the firm.

Determinants of Supply/Factor Responsible to change in the quantity of supply of a
product?:

The factors on which the supply of a product or a service are:

 Firm goals.
 Cost of inputs or factors.
 Technology.
 Government policy.
 Expectations.
 Costs of other commodities.
 The number of firms.
 Natural factors.
 Price of the commodities.

Firm Goals:

The supply of merchandise or products additionally relies upon the objectives of an association or
an organisation. An association might have different objectives, for example, sales maximisation,
employment maximisation, profit maximisation, and so on.

Where the association’s goal is profit maximisation, it will sell more products when benefits or
profits are high and less quantity of products when the benefits or profits are low.

Cost of Inputs or Factors:

The cost of factors of production and inputs like land, work, capital, and business venture likewise
decide the supply of the products. At the point when the cost of resources is low, the expense of
production is likewise low.

Thus, now, the organisations will more often than not supply more products in the market as well
as the other way around.

Technology:

When a firm uses new innovation, it saves resources and furthermore decreases the expense of
creation or production or manufacturing. Accordingly, firms produce more and supply a greater
quantity of goods.
Government Policy:

The taxation rebates, subsidies, and policies given by the public authority likewise sway the supply
of goods.
When the charges on taxes are high, the manufacturers are reluctant to create more merchandise
or products, and hence, the supply will decrease.
On the other hand, when the public authority allows different rebates, subsidies, and gives
monetary guides to the manufacturers, they increment the development or production of products.
Subsequently, the supply likewise increases.

Expectations:

When the makers or providers expect that the cost will increase later in the near future, they hold
onto the merchandise so they can sell them at greater costs later. This will bring about a
diminishing in the supply of products.
Similarly, in the event that they anticipate a fall in cost, they will build the supply of merchandise.

Costs of other Commodities:

When the cost of corresponding products expands, their supply additionally increments. Along
these lines, these outcomes result in an increment in the supply of products additionally and vice-
versa.
Also, when the cost of the substitutes increases, their supply likewise increments. This outcome is
an abatement in the supply of goods.

Number of Firms:

When the number of firms in the market increments, the inventory or supply of merchandise
additionally increments and vice-versa.

Natural Factors:

The factors like climate conditions, floods, pests, droughts, and so forth likewise influence the
stock of products. At the point when these variables are ideal, the supply will increment.

Price of the Commodity:

It is the primary and the main determinant of demand. At the point when the cost or the price of
the product or commodity is high, the providers or manufacturers will sell more commodities.
Thus, the supply of the product increments. Likewise, when the cost is low, the inventory or supply
of the product diminishes inferable from the immediate connection between the cost of an item
and its supply.

Or,
Determinants of Supply:
Cost of the factors of production
 This includes expenses related to labor, raw materials, machinery, land, and other inputs
required for production.
 A rise in the cost of production decreases supply because it makes producing goods more
expensive for firms. Conversely, a decrease in production costs increases supply.
 For example, if the price of oil increases, it raises transportation costs, impacting the cost
of production for many industries, leading to a decrease in supply.

Change in technology
 Technological developments can result in higher production process efficiency, therefore
lowering costs and raising supply availability.
 New technologies might let companies generate more output with the same level of inputs,
hence boosting supply.
 On the other hand, old technology might lead to lower supply and more manufacturing
expenses.
 For example, the implementation of automated technology in manufacturing operations
can produce lower prices and higher rates of output, therefore generating more supplies.

Price of related goods

 Complementary products are eaten together; substitute goods are those that can be used in
place of one another.
 Rising the cost of substitute items could force manufacturers to redirect resources into the
manufacturing of the present good, therefore increasing its availability.
 On the other hand, a drop in the price of complementing products could cut supply if
companies expect less demand for their offering.
 For instance, buyers might choose tea instead of coffee if its price rises, which would force
coffee growers to boost their output.

Change in the number of companies in the industry

 Firm entrance or departure within an industry can influence supply and market
competitiveness.
 An rise in the number of companies could intensify competitiveness, which would result
in more supplies as companies try to take market share.
  On the other hand, the departure of companies might lower supply, especially if the
surviving companies cannot satisfy the market need.
 If new companies join the smartphone market, for example, the more competitiveness can
result in more supplies as companies try to draw consumers with fresh ideas.

Taxes and Subsidies

 Taxes increase production costs, reducing supply, while subsidies lower costs, increasing
supply.
 For example, an increase in corporate taxes may lead to higher production costs for
businesses, resulting in a decrease in supply. Conversely, government subsidies for
renewable energy may lower production costs for solar panels, increasing their supply.
 The goal of a business firm
 Companies want to maximize earnings by creating items and services with best returns.
 Changes in government policy or state of the market could affect companies' profit
incentives and, hence, their supply choices.
 For a commodity whose demand rises, for instance, companies might boost supply to
profitably take advantage of better prices.

Natural Factors
 Natural disasters, climate change, and environmental variables can all interfere with
manufacturing processes and influence supply of goods.
 A drought might, for example, lower crop yields, therefore affecting the supply of
agricultural goods. In a same vein, a hurricane might compromise infrastructure and cause
havoc on transportation systems, therefore affecting supply chains and lowering supply.

Why is the supply curve upward sloping?

The supply curve is upward sloping due to two main factors: increasing opportunity cost and
rising marginal cost. As producers increase output, they face higher costs per unit, requiring
higher prices to justify continued production. This relationship between price and quantity
supplied results in the characteristic upward slope of the supply curve.

Profit incentive: As the market price of a good or service rises, suppliers are motivated to
produce more of it to increase their profits. The higher revenue per unit makes it more appealing
to increase production over other, less profitable goods.

Rising marginal costs: To increase production, especially in the short term, suppliers often face
higher costs for each additional unit produced. The law of increasing opportunity cost means
producers must use less efficient resources or pay higher wages for overtime, which raises the
marginal cost. A higher price is needed to cover these rising costs and maintain profitability,
which is why the quantity supplied increases as the price rises.

Marginal cost connection: The supply curve is essentially a visual representation of a firm's
marginal cost curve. Profit-maximizing firms will only increase their output as long as the price
they receive covers the cost of producing that extra unit. This relationship creates the upward-
sloping curve.

Entry of new suppliers: A sustained period of higher prices can attract new producers into the
market. Their entry further increases the total quantity supplied at that price level, contributing to
the upward slope of the overall market supply curve.

What does Market Equilibrium mean?

Market equilibrium is a stable state in a market where the quantities of supply and demand
are equal. Market equilibrium occurs at an equilibrium price where the amount that buyers
wish to purchase matches the amount that sellers wish to sell. Equilibrium creates a state
where there are no inherent market pressures to raise or lower the price.
Market equilibrium results from the forces of supply and demand. The equilibrium price is
determined by the intersection of the supply and demand curves. Below is a pictorial
representation of the supply and demand curve.
The quantity supplied exceeds demand at a higher price, resulting in a surplus that causes
the price to fall. Demand exceeds supply at a lower price, resulting in a shortage that
causes the price to rise. The equilibrium price balances these forces at a stable point.
Three characteristics of market equilibrium are equilibrium price, quantity and the
absence of shortages and surpluses.
Equilibrium price
The quantity supplied by sellers equals the quantity demanded by buyers at the
equilibrium price. Neither buyers nor sellers have an incentive to change from this price.
Equilibrium quantity
The quantity transacted that corresponds to the equilibrium price. Buyers purchase the
same amount that sellers provide.

At the equilibrium point Demand=Supply Explain?

At market equilibrium, demand equals supply because it is the point where the desires of
consumers and producers align at a single price, resulting in a stable market. At this "market-
clearing price," there are no surpluses (excess supply) or shortages (excess demand). If the price
is too high, supply will exceed demand, pushing prices down, while a price that is too low will
lead to shortages, prompting buyers to bid prices up until the quantity demanded equals the
quantity supplied.
Why Demand Equals Supply at Equilibrium
Price Mechanism: In a free market, the price acts as a signal. If there is excess supply (a surplus),
sellers will lower their prices to sell their goods. Conversely, if there is excess demand (a shortage),
buyers will bid prices up to get the goods.
No Surplus or Shortage: Equilibrium is the point where the quantity of a good that consumers
want to buy (quantity demanded) exactly matches the quantity that producers are willing to sell
(quantity supplied).
Stability: This balance creates stability in the market. When the price is at equilibrium, the market
"clears," meaning all units supplied are purchased, and all consumers who want to buy at that price
can find the product.

How does technology change affect supply?

Technology primarily affects the supply of goods and services by improving production efficiency
and reducing costs, which leads to an outward shift of the supply curve to the right. This means
that at any given price, producers are able and willing to supply more of a good or service than
before, due to factors like lower input costs and higher output levels. For example, advances in
computer technology have lowered production costs, enabling manufacturers to supply more
laptops at lower prices, increasing their overall availability.
How Technology Impacts Supply
Increased Efficiency: New technologies can streamline production processes, allowing
businesses to produce more goods in less time and with fewer resources.
Reduced Costs: Efficiency gains often translate into lower production costs, as fewer labor,
materials, or energy are needed to produce each unit.
Higher Output: With more efficient processes and lower costs, companies can increase their
overall production volume.
Improved Quality: Technology can also enhance product quality and functionality, making
products more appealing to consumers and potentially increasing their market demand.
Shift in the Supply Curve: These positive impacts on efficiency and cost lead to an increase in
supply, which is represented graphically by a rightward shift of the supply curve. This means more
goods are available at any given price point.

Math

FINDING EQUILIBRIUM WITH ALGEBRA

We’ve just explained two ways of finding a market equilibrium: by looking at a table
showing the quantity demanded and supplied at different prices, and by looking at a
graph of demand and supply. We can also identify the equilibrium with a little algebra if
we have equations for the supply and demand curves. Let’s practice solving a few
equations that you will see later in the course. Right now, we are only going to focus on
the math. Later you’ll learn why these models work the way they do, but let’s start by
focusing on solving the equations. Suppose that the demand for soda is given by the
following equation:
Qd=16–2P
where Qd is the amount of soda that consumers want to buy (i.e., quantity demanded),
and P is the price of soda. Suppose the supply of soda is
Qs=2+5P
where Qs is the amount of soda that producers will supply (i.e., quantity supplied).
(Remember, these are simple equations for lines). Finally, recall that the soda market
converges to the point where supply equals demand, or
Qd=Qs
We now have a system of three equations and three unknowns (Qd, Qs, and P), which
we can solve with algebra. Since
Qd=Qs,
we can set the demand and supply equations equal to each other:
Qd=Qs16−2P=2+5P
Step 1: Isolate the variable by adding 2P to both sides of the equation, and subtracting
2 from both sides.
16−2P=2+5P−2+2P=−2+2P14=7P
Step 2: Simplify the equation by dividing both sides by 7.
14–––=7P–––772=P
The equilibrium price of soda, that is, the price where Qs = Qd will be $2. Now we want
to determine the quantity amount of soda. We can do this by plugging the equilibrium
price into either the equation showing the demand for soda or the equation showing the
supply of soda. Let’s use demand. Remember, the formula for quantity demanded is the
following:
Qd=16−2P
Taking the price of $2, and plugging it into the demand equation, we get
Qd=16–2(2)Qd=16–4Qd=12
So, if the price is $2 each, consumers will purchase 12. How much will producers
supply, or what is the quantity supplied? Taking the price of $2, and plugging it into the
equation for quantity supplied, we get the following:
Qs=2+5PQs=2+5(2)Qs=2+10Qs=12
Now, if the price is $2 each, producers will supply 12 sodas. This means that we did our
math correctly, since
Qd=Qs
and both Qd and Qs are equal to 12. That confirms that we’ve found the equilibrium
quantity.

Math practice: Exam kit Book(2,3,4,5,6,7,8,10)