ECONOMICS FOR ENGINEERS

UNIT 1 By: Ms. Ashiya

Economics Definition: Economics is that branch of social science which is

concerned with the study of how individuals, households, firms, industries and
government take decision relating to the allocation of limited resources to
productive uses, so as to derive maximum gain or satisfaction.
In the 20th century, English economist Lionel Robbins defined economics as “the
science which studies human behaviour as a relationship between (given) ends
and scarce means which have alternative uses.
Basic Problems Of An Economy
If there is a central economic problem that is present across all countries,
without any exception, then it is the problem of scarcity. This problem arises
because the resources of all types are limited and have alternative uses. If
the resources were unlimited or if a resource only had one single use, then the
economic problem would probably not arise. However, be it natural productive
resources or man-made capital/consumer goods or money or time, scarcity of
resources is the central problem. This central problem gives rise to four basic
problems of an economy. In this article, we will look at these basic problems in
detail.
The Four Basic Problems of an Economy
As discussed in the paragraph above, the central economic problem of scarcity
of resources is broken down into four basic problems of an economy. Let’s look
at each of them separately.
Basic Problems of an Economy – #1 – What to Produce?
What does a society do when the resources are limited? It decides which
goods/service it wants to produce. Further, it also determines
the quantity required. For example, should we produce more guns or more
butter? Do we opt for capital goods like machines, equipment, etc. or
consumer goods like cell phones, etc.? While it sounds elementary, society must
decide the type and quantity of every single good/service to be produced.
Basic Problems of an Economy – #2 – How to Produce?
The production of a good is possible by various methods. For example, you can
produce cotton cloth using handlooms, power looms or automatic looms. While
handlooms require more labour, automatic looms need higher power and capital
investment.
Hence, society must choose between the techniques to produce the commodity.
Similarly, for all goods and/or services, similar decisions are necessary. Further,
the choice depends on the availability of different factors of production and their
prices. Usually, a society opts for a technique that optimally utilizes its available
resources.
Basic Problems of an Economy – #3 – For whom to Produce?
Think about it – can a society satisfy each and every human wants? Certainly
not. Therefore, it has to decide on who gets what share of the total output of
goods and services produced. In other words, society decides on the distribution
of the goods and services among the members of society.
Basic Problems of an Economy – #4 – What provision should be made for
economic growth?
Can a society use all its resources for current consumption? Yes, it can. However,
it is not likely to do so. The reason is simple. If a society uses all its resources for
current consumption, then its production capacity would never increase.
Therefore, the standard of living and the income of a member of the society will
remain constant. Subsequently, in the future, the standard of living will decline.
Hence, society must decide on the part of the resources that it wants to save for
future

What is 'Microeconomics'

Definition: Microeconomics is the study of individuals, households and firms'

behavior in decision making and allocation of resources. It generally applies to
markets of goods and services and deals with individual and economicissues.

Description: Microeconomic study deals with what choices people make, what
factors influence their choices and how their decisions affect the goods markets
by affecting the price, the supply and demand.
Scope of Microeconomics:
In micro economics the following problems and theories are discussed:
1. Price Theory
According to Prof. Robbins, human wants are unlimited but the resources to
satisfy them are limited. Therefore, we face the problem of choice in wants and
economy in means. This problem is solved by the price mechanism
automatically. In other words, prices of all goods are determined by the
equilibrium of demand and supply. So, demand and supply are discussed in
micro economics.
Each economic system has to make the decisions regarding what is to produced,
how it is to be produced and how the resources to be allocated amongst the
different competing uses. Such all, under capitalism, is performed with the help
“Price Mechanism” i.e., those goods will be produced by the producers which
maximize their profits; those techniques will be adopted which minimize their
cost of production and the resources will be allocated in those uses where the
resource command higher prices etc. Thus, in the micro economics, we deal with
the problem of production, consumption, distribution and resource allocation.
2. Theory of Consumer Behaviour and Demand
In this part, consumer’s behaviour is studied. It is examined how he satisfies his
multiple ends with his scarce means e.g., why consumers purchase goods and
which factors influence their decisions. In other words, theory of utility, concepts
of demand and elasticity of demand are studied in it.
As everyone has to face the problem of multiplicity of wants and limited money
income. In such state of affairs, it is the desire of each consumer to maximize his
satisfaction, when so happens the consumer is said to be in equilibrium. Much
the micro economics deals with the problem of equilibrium.
3. Theory of Production Behaviour
In capitalism factories are in private ownership. Therefore, quantity of production
of goods is decided by different firms individually. Every firm tries to get
equilibrium or maximize its profit. For this purpose, a firm tries to find optimum
combination of factors. Each student of Economics is well aware of with the four
factors of production like land, labor, capital and entrepreneur.
These factors are responsible for production activities. According to classical
economists, in short run, the production depends upon the units of labor only
while the capital etc. is kept fixed, In such state of affairs the total production
increases at different rates. This phenomenon is known as “Law of Variable
Proportions” in micro economic theory.
4. Theory of firm Behaviour:
Like a consumer, the firm also wants to attain equilibrium. While the equilibrium
of the firm is attached with “Minimization of Costs” or “Maximization of Output”.
Both these situations are also known as “Optimum Factor Combination of a firm”,
Thus to describe firm’s equilibrium or “optimum factor combination”, we have
two approaches in micro economics (1) Classical’s Marginal Productivity theory
(2 Neo-Classical’s “Isoquant – Iso Cot Approach”.
5. Theory of Costs and Revenues:
In micro economics we study different types of costs of production. The analysis
of costs of production may be from short run point of view as well as from long
run point of view. In this context the traditional and modem approaches are
adopted. Moreover, different types of revenues arc also considered in
microeconomics.
6. Theory of Market Structure and Behaviour:
The types of market like Perfect Competition, Monopoly, Duopoly and
Monopolistic Competition are of greater significance for the readers of micro
economics. Accordingly, here it is analyzed that how the firms under different
market conditions make decisions regarding the determination of price and
output.
7. Theory of Income Distribution:
The national income of a country is the result of joint efforts of land, labor,
capital and organization. Accordingly, the national income, has to be distributed
amongst these factors. OR it is to be seen that how the factor prices like wages
will determined in the competitive and nor competitive markets. Thus, for this
purpose we have the classical and neo classical theories in microeconomics.
8. Theory of General Equilibrium:
The Consumer equilibrium and the Producer equilibrium are the representatives
of partial equilibria. But the existence of equilibrium of all the consumers of the
economy or all the producers of the economy generates General equilibrium of
consumption or production. Such all along with different criteria of welfare
economics are the important issues of microeconomics.
9. Theory of Welfare Economics:
In the present time, social as well as economic welfare has attained greater
importance. Accordingly, the economists have to devise those measures and
criteria which are aimed at creating efficiency and optimality in the economic
system. Therefore, in microeconomics, we study different techniques
which bring welfare to the people.
10. Economics of Uncertainty:
Most of the traditional or classical economics is based upon certainty, i.e., the
economic agents do not have to face risk while making decisions. But in the
present time the element of risk has attained a lot of importance. Accordingly,
economic theories are also being devised on the basis of uncertainty. Therefore,
in microeconomics, we also study the economics of uncertainty.
Uses / Importance / Advantages of Microeconomics:
We can realize the importance of the study of micro economics from the
following points.
1. Utility Maximization:
It teaches us to purchase the required products in most suitable quantities so
that the total utility obtained is maximized. Hence, Micro economic analysis
explains us the optimum use of our income and by virtue of it enables us to
avoid the wastage of hard-earned income.
2. Resource Allocation:
by the study of micro economics we come to know how millions of consumers
and producers allocate their consumption and production resources in an
attempt to achieve their optimum level.
3. Income Distribution:
By the distribution theories we learn the determination of rewards to factors of
production in the form of rent, interest, wages and profit by which distribution of
wealth takes place. Unequal distribution of income will lead to unequal
distribution of wealth. It will then consequently provoke reaction to achieve fair
and relatively equal distribution of income/wealth in a society.
4. Price Determination:
The study of micro economics is highly helpful in understanding the
determination of relative prices for the productive services rendered by different
factors of production.
5. Optimization:
It also helps entrepreneurs to achieve optimum production point with their
budget constraint. By this, they can maximize their profit or at least they will
minimize their losses.
6. Welfare Policies: It also helps to frame economic policies aimed at achieving
public welfare e.g. tax exemption for the poor, determination of rewards
according to qualification and productive capabilities, minimum wage laws etc.
7. Guidance for Consumers:
It enables the consumers to allocate their income on different goods in such a
way that total utility is maximized; thus, helping them to avoid the wastage of
resources.
8. Guidance for Producers:
It enables entrepreneurs to achieve the optimum combination of factors of
production and thereby it enables them to maximize their profit: or at least
minimize their losses. When the rewards of factors of production are determined
in accordance with their marginal productivity, the chances of their exploitation
are minimized. Thus, it enables labourers as well to achieve suitable rewards for
their productive services.
9. Coordination Between Small Units of Economy:
It also provides guidance for small segments of an economy to bear them well
coordinated with each other. Moreover, the study of micro economics is essential
to achieve the best outcome of macro policies.
Disadvantages / Limitations of Microeconomics:
Following are the demerits of micro economic analysis and policies related to it.
1. Free Market Economy:
Microeconomics is based on the idea of free market economy. In fact, there Is no
free market economy after great depression of 1930.
2. Study of Parts:
Microeconomics is concerned with study of parts but not the whole. In terms of
individual terms, it is impossible to describe large and complex universe of facts
like economic system.
3. Misleading for Analysis:
Microeconomics is inadequate and misleading for analysis of economic problems.
The principles relating to an individual household cannot be applied to the whole.
economic system.
4. Full Employment:
Microeconomics assumes that there is full employment. There is no full
employment at all times in this world. Full employment is an exception in
practical life.
5. Economic Instability:
When every single firm it allowed to operate freely in an open economy, it would
naturally go for self-interest; even at the cost of national interest. Thus, it would
disrupt the cohesion between different productive units which will ultimately
force the economy to move into depression. A free enterprise economy is
therefore an unstable economy i.e. the economy which keep: on fluctuating with
boom: and depressions.
6. Exploitation of Consumers:
Inspite of proper guidance for the consumers the real-life situation reveals that
they are exploited. This happens with the rising rate of inflation iii an economy.
With the pace of inflation, on one hand, wealth keeps on concentrating in a few
hands while, on the other hand, consumers are deprived of their purchasing
power. The natural inequality of income distribution in a free enterprise economy
leads to exploitation of consumers.
7. Exploitation of Labourers:
Entrepreneurs exploit their labourers by keeping their wage rate low or even
lower than their marginal productivity. This happens in three ways:
(i) By forcing labourers to work for more hours than required under labour laws.
(ii) By installing automatic and computerized plants to increase the marginal
productivity of labour which is not followed by increase in their wage rate.
(iii) By setting up production units in remote areas to employ labour at
notoriously low wage rate.
8. Absence of Large-Scale Production:
Micro economic analysis encourages setting up of small units for growth of
economy. This could possibly be achieved more efficiently by initiating and
encouraging large scale production.
9. Unrealistic Assumptions:
Micro economics is based on unrealistic assumptions, especially in case of full
employment assumption which does not exist practically. Even behaviour of one
individual cannot be generalised as the behaviour of all.
10. Inadequate Data:
Micro economics is based on the information dealing with individual behaviour,
individual customers. Hence, it is difficult to get correct information. So, because
of incorrect data Micro Economics may provide inaccurate results.
Macroeconomics / Macro Economic Analysis:
The word “MACRO“. is derived from the Greek word “MAKROS“, which means
large. Macroeconomics studies the economic actions and behaviours of an
economy at aggregate or average levels and explains the problems at national
and international levels. Macroeconomics is also called “The Theory of Income
and Employment “, because it deals with the matters of unemployment,
economic fluctuations, inflation, deflation, economic development, and
international trade etc.
The concept of macroeconomics was introduced during 1930 when economies
were facing economic crisis. Macroeconomics studies the economy as a whole. It
is concerned with total income, total output, employment, total consumption,
total saving, total investment and general price level. It, is aggregative
economics that provides whole view of the economy.
Macroeconomics is called income and employment theory. It deals with the
problems of unemployment, trade cycles, general price level and international
trade and economic growth. It studies the causes of unemployment and different
determinants of employment. It is concerned with trade cycles so it examines
the effect of investment on total output, total income and total employment.
It deals with monetary matters in order to check effect of total quantity of money
on general price level in the field of international trade it studies problems of
balance of payments and foreign aid. In fact, macroeconomics examines
problems relating to determination of total income of the country and causes of
changes in total income. Moreover, it studies the factors relating to economic
growth.
Scope of Macroeconomics:
From the above discussion we find that macroeconomics has the following scope.
1.Theory of National Income:
In macroeconomics we study ‘NI’; its different concepts and its measurement.
2. Theory of NI Determination:
The major part of macroeconomics deals with the theory of NI determination.
Accordingly, in macroeconomics, we study classical and Keynesian theories of
national income and employment.
3. Theory of NI Fluctuations:
In capitalist economies, the economic activities are never alike. Sometimes there
is a brisk in economic life, while on the other occasions, the business activities
are sluggish. Such fluctuations in economic life of a country are known as trade
cycles. Why there are such fluctuations? In this context we study a lot of
theories, particularly, “Samuelson’s Multiplier-Accelerator” interaction is of great
importance for the readers of macroeconomics.
4. Theory of Consumption and Savings:
In macroeconomics, AD plays an important role. The AD has an important
component which is Consumption (C). The consumption has a counterpart which
is Saving (S). How people behave regarding consumption expenditures and
savings? In this connection, starting from Keynes consumption function, we have
a lot of consumption theories like Dusenberry’s Relative Income Theory”, ”
Friedman’s Permanent Income Theory” and “Modigliani’s Life Cycle Income
Theory “.
5. Theory of Money:
In an economy ‘money’ plays an important role. What will be the effects of
changes in supply of money on the economy? What are inflation and deflation?
What causes the inflation. What is demand pull and cost push inflation? What a
Phillips curve shows? In this respect we study a lot of theories in
macroeconomics.
6. Theory of Economic Stabilization:
As told earlier that in capitalist economies, inflation, unemployment, unequal
income distribution, misallocation of resources, deficit in BOP and budget deficits
are the routine problems. Therefore, to remove them or for the sake of economic
stabilization, government has to intervene with the help of ” Fiscal and Monetary
Policies”. The role of such policies will be analyzed in macroeconomics.
7. Theory of Growth:
The Keynes model of income and employment just deals with static and
comparative static situations. But in addition to this model,
we have a lot of dynamic growth models in macroeconomics where we study the
growth path of the economy; effect of change in population on the level of NI:
the effect of change in technology on the level of NI, etc.
Importance of Macro Economics:
We can realize the importance of the study of macroeconomics from the
following points.
1. Working of Economy:
Macroeconomics is helpful to understand working of economy. Economic system
is complicated. Many interdependent-economic factors affect the economy.
Microeconomics cannot provide clear picture of whole economy.
2. Making Economic Policies:
Macroeconomics is used to make economic policies. There is need facts and
figures abut national income, total employment, total investment, total saving
and general price level. Macroeconomics can provide statistics about such
variables.
3. Solves Economic Problems:
An economy can face problems like overproduction, unemployment, and rising
price level. The government can solve its problems
ith the help of macroeconomics.
4. Studies Trade Cycles:
The capitalistic economies can face problem of trade cycles or ups and downs, in
business activities. Such problems upset the proper working of economy.
Macroeconomics provides solution to overcome difficulties of trade cycles.
5. Widens Scope of Microeconomics:
The laws of microeconomics are framed with the help of macroeconomics. The
law of diminishing marginal utility is derived from analysis of aggregate
behaviour of people.
6. Changes in Price Level:
Macroeconomics deals with the problems of changes in price level. There may be
inflation, deflation, or stagflation. The changes in price level create disturbance
for proper working of economy.
7. Study of National Income:
The study of national income explains various problems of economy. National
income of any Country can show its economic conditions. The population control
program or defense program depend upon national income. Macroeconomics is
used to calculate national income.
Limitations:
1. Dependence on Individual Units:
Macroeconomics deals with aggregates and such aggregates are taken from
individuals. The results of aggregates may be different from individual. What is
good for individual may not be good for the economy. The saving for a person is
good but it is bad for whole economy. There is decrease in national income due
to saving of society. Thus, decisions for economy on the basis of individual
behaviour are wrong.
2. Statistical Difficulties:
The measurement of macroeconomic problems involves statistical difficulties.
These problems relate to aggregation of microeconomic variables. When
microeconomic variables relate to dissimilar individual units the aggregates of
such variable provide wrong results.
3. Indiscriminate Use is Bad:
Indiscriminate use of macroeconomics for analysis of problems is bad. The
measures suggested to control general price level may to be useful in controlling
prices of individual products.
4. Aggregate Variables May Be Useless:
The aggregate variables relating to an economic system may not provide
significant results. The national income of any country may be divided by
population provides per head income. An Increase in national income does not
means that income of every individual has gone up.
5. Aggregates Are Not Similar:
Macroeconomics considers that aggregates are similar without checking their
internal structure. Average wages are calculated with the help of total wages of
all workers. The wages of one sector may increase while that of other may
decreases but average will remain the same and aggregates may differ.
The points given below explains the difference between micro and macro
economics in detail:
Microeconomics studies the particular segment of the economy, i.e. an
individual, household, firm, or industry. It studies the issues of the economy at
an individual level. On the other hand, Macroeconomics studies the whole
economy, that does not talk about a single unit rather it studies aggregate units,
such as national income, general price level, total consumption, etc. It deals with
broad economic issues.
Microeconomics stresses on individual economic units. As against this, the focus
of macroeconomics is on aggregate economic variables.
Microeconomics is applied to operational or internal issues, whereas
environmental and external issues are the concern of macroeconomics.
The basic tools of microeconomics are demand and supply. Conversely,
aggregate demand and aggregate supply are the primary tools of
macroeconomics.
Microeconomics deals with an individual product, firm, household, industry,
wages, prices, etc. Conversely, Macroeconomics deals with aggregates like
national income, national output, price level, total consumption, total savings,
total investment, etc.
Microeconomics covers issues like how the price of a particular commodity will
affect its quantity demanded and quantity supplied and vice versa. In contrast,
Macroeconomics covers major issues of an economy like unemployment,
monetary/ fiscal policies, poverty, international trade, inflationary increase in
prices, deficit, etc.

Microeconomics determine the price of a particular commodity along with the

prices of complementary and the substitute goods, whereas the Macroeconomics
helps maintain the general price level, as well as it helps in resolving major
economic issues like inflation, deflation, disinflation, poverty, unemployment,
etc.
While analysing any economy, microeconomics takes a bottom-up approach,
whereas the macroeconomics considers a top-down approach.

What is Production Possibility Curve?

In economics, the Production Possibility Curve provides an overview of the
maximum output of a good that can be produced in an economy by using
available resources with respect to quantities of other goods produced. It is also
known as Production Possibility Frontier (PPF) or transformation curve.
Production Possibility Curve Example
Let us learn Production Possibility Curve with the help of an example.
Suppose an organisation decided to produce two goods A and B with its available
resources. If all the resources are used in producing A, then 100 lakh units of A
can be produced, whereas if all the resources are used in producing B, then 4000
units of B can be produced. If both the goods are produced, then there is
possibility of various combinations as shown in Table:

A ( in lakhs) B (in thousands)

100 0

90 1

70 2

40 3

0 4
As shown in Figure, the attainable combinations are A, B, C, D and E from the
given resources. A and E are the combinations that produce only one good at a
time. The unattainable combination is F as it is outside the PPC. G is the
inefficient combination, which is inside the PPC. It implies that the resources are
underutilised.
From Figure, it can be noticed that PPC is concave to origin. It is because the
increase in production of one unit of good is accompanied by the sacrifice of
units of the other good. The rate at which an amount of product is sacrificed for
producing the amount of another product is called Marginal Rate of
Transformation (MRT).
For example, in case of A and B, the amount of product B that is sacrificed to
produce the amount of product A is termed as MRT. The slope of PPC is also MRT.
Increasing MRT implies increasing slope of PPC.

Uses of Production Possibility Curve

Let us discuss some important Uses of Production Possibility Curve:

It enables the planning authority of a developed nation to divert the usage of its
resources for the production of necessary goods to the production of luxury
goods and from consumer goods to producer’s goods, after a certain point of
time.

It helps a democratic nation to focus and shift a major amount of resources in

the production of public sector goods instead of private sector goods. The public
sector goods are supplied and financed by government, such as public utilities,
free education and medical facilities.

On the other hand, private sector goods are manufactured by privately owned
organisations and are purchased by individuals at a certain price.

It helps in guiding the movement of resources from producer goods to capital

goods, such as machines, which, in turn, increases the productive resources of a
country for achieving a high production level.

Understanding the Circular Flow Model

The idea of circular flow was first introduced by economist Richard Cantillon in
the 18th century and then progressively developed by Quesnay, Marx, Keynes,
and many other economists. It is one of the most basic concepts
in macroeconomics.
How an economy runs can be simplified as two cycles flowing in opposite
directions. One is goods and services flowing from businesses to individuals, and
individuals provide resources for production (labor force) back to the businesses.
In the other direction, money flows from individuals to businesses as consumer
expenditures on goods and services and flows back to individuals as personal
income (wages, dividends, etc.) for the labor force provided. This is the most
basic circular flow model of an economy. In reality, there are more parties
participating in a more complex structure of circular flows.
Circular Flow Models with Sectors
Two-Sector Model
The model described above is the two-sector model, which is the most basic
model containing only two sectors: individuals or households and businesses. In
the two-sector model, it is assumed that households spend all their incomes as
consumer expenditures and purchase the goods and services produced by
businesses. Thus, there are no taxes, savings, or investments that are associated
with other sectors.
Three-Sector Model
In the three-sector model, the government is added to the two-sector model. In
this model, money flows from households and businesses to the government in
the form of taxes. The government pays back in the form of government
expenditures through subsidies, benefit programs, public services, etc.
Four-Sector Model
The four-sector model contains the foreign sector, which is also known as the
overseas sector or external sector. The overseas sector turns a closed economy
into an open economy. It is connected to the other sectors through two flows of
money: foreign trade (imports and exports) and foreign exchange (inflow and
outflow of capital). Like the other sectors, each flow of money is paired with a
flow of a factor of production or goods and services.
Five-Sector Model
The fifth sector – the financial sector – is added to complete the circular flow
model. It includes banks and other institutions that provide borrowing and
lending services to the other sectors. Savings and investments are assumed in
the five-sector model, which flow from other sectors with residual cash into the
financial institutions, then out to the sectors that need money. As long as lending
(injection) is equal to borrowing (leakage), the circular flow reaches an
equilibrium and can continue forever.
Demand theory

Definitions:
“Demand for a commodity is the quantity which a consumer is willing to buy at a
particular price at a particular time.”
“The demand for anything, at a given price, is the amount of it which will be
bought per unit of time at that price.” -PROF. BENHAM
Demand function shows the relationship between quantity demanded for a
particular commodity and the factors influencing it. It can be either with respect
to one consumer or to all the consumers in the market.

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.
A consumer’s demand for a commodity is influenced by the following factors:
1. A consumer’s demand for a commodity is influenced by the price of that
commodity. Usually the higher the price, the lower will be the quantity
demanded.
2. A consumer’s demand for a commodity is influenced by the size of his income.
In most cases, the larger the income, the greater will be the quantity demanded.
3. A consumer’s demand for a commodity is influenced by the prices of related
commodities. They may be complementary or substitutes.
4. The tastes of the consumers.

In technical language, it is said that the demand for a commodity is a function of

the four variables like:
q = f(P, Y, Pr, T)
Where q stands for quantity demanded, P stands for the price of the commodity
in question, Y stands for the income of the consumer, P r indicates prices of the
related commodities and T denotes the Tastes of the consumer and f stands for
function. But in practice the three of these four variables remain constant. And
hence the demand function takes the form of-
q = f(P)

Factors Determining Individual Demand:

1. Price of the Product:
Demand for a commodity depends on its price. As price rises, for a normal good,
demand falls and vice-versa. However, there are exceptions, i.e., for Giffen
goods, as price rises demand also rises.
2. Income of the Consumer:
A key determinant of demand is the level of income i.e., the higher the level of
income the higher the demand for a given commodity. Consumer’s income and
quantity demanded are generally related positively. It means that when income
of the consumer rises he wants to have more units of that commodity and when
his income falls he reduces the demand. In consumer theory, an inferior good is
a good that decreases in demand when consumer income rises i.e., increase in
income reduces the demand because the consumer shifts his consumption to
superior goods and forgoes his existing product. Thus reducing its demand.
Cheaper cars are examples of the inferior goods. Consumers will generally prefer
cheaper cars when their income is constricted. As a consumer’s income
increases the demand for cheap cars decreases and demand for costly cars
increases.
3. Prices of Related Goods:
Consumption choices are also influenced by the alternative options available to
users in the relevant market place. Market information regarding alternative
products, quality, convenience and dependability all influence choices.
The two products may be related in two ways- Firstly, as complementary goods
and secondly as substitute goods.
Complementary goods are those goods which are used jointly and consumed
together like tennis ball and a racket, petrol and car. The relationship between
the price of a product and the quantity demanded of another is inverse. For
example if the price of cars were to rise, less people would choose to buy and
use cars, switching perhaps to public transport-trains. It follows that under these
circumstances the demand for the complementary good petrol would also
decrease.
Goods which are perceived by the consumer to be alternatives to a product are
termed as substitute goods. There is direct relationship between the demand for
a product and the price of its substitute. Example- scooter and a motorcycle, tea
and coffee.
The increase in price of tea would decrease its quantity demanded and people
would switch over to its substitute commodity coffee.
4. Consumer’s Tastes and Preferences:
Demand for a product is also affected by the tastes and preferences of the
consumers. As tastes and preferences shift from one commodity to the other,
demand for the first commodity reduces and that of the other rises.
5. Expectation of Future Prices:
The current demand of a product also depends on its expected price in future. If
future price is expected to rise, its present demand immediately increases
because the consumer has a tendency to store it at low prices for his future
consumption. If, however the price of a product is expected to fall then he has a
tendency to postpone its consumption and as a result the present demand would
also fall.
6. Economic Conditions:
The demand for commodities also depends upon prevailing business conditions
in the country. For, example- during the inflationary period, more money is in
circulation and people have more purchasing power. This causes an increase in
demand of various goods even at higher prices. Similarly, during deflation
(depression), the demand for various goods reduces in spite of lower prices
because people do not have enough money to buy.

Demand Schedule:
The demand schedule in economics is a table of quantity demanded of a good at
different price levels. Given the price level, it is easy to determine the expected
quantity demanded. This demand schedule can be graphed as a continuous
demand curve on a chart where the Y-axis represents price and the X-axis
represents the quantity.
1. Individual Demand Schedule:
It represents the demand of an individual’ for a commodity at different prices at
a particular time period. The adjoining table 7.1 shows a demand schedule for
oranges on 7th July, 2009.

2. Market Demand Schedule:

Market Demand Schedule is defined as the quantities of a given commodity
which all consumers will buy at all possible prices at given moment of time. In a
market, there are several consumers, and each has a different liking, taste,
preference and income. Every consumer has a different demand.
The market demand actually represents the demand of all the consumers
combined together. When a particular commodity has several brands or types of
commodities, the market demand schedule becomes very complicated because
of various factors. However, for a single item, the market demand schedule is
rather simple.

Demand Curves (Diagram):

The demand curve is a graphic statement or presentation of the relationship
between product price and the quantity of the product demanded. It is drawn
with price on the vertical axis of the graph and quantity demanded on the
horizontal axis.
Demand curve does not tell us the price. It only tells us how much quantity of
goods would be purchased by the consumer at various possible prices.
1. Individual Demand Curve:
An Individual Demand Curve is a graphical representation of the quantities of a
commodity that an individual (a particular consumer) stands ready to take off the
market at a given instant of time against different prices.

2. Market Demand Curve:

A Market Demand Curve is a graphical representation of the quantities of a
commodity which all the buyers in the market stand ready to take off at all
possible prices at a given moment of time.

Both, the individual consumer’s demand curve is a straight line. A demand curve
will slope downward to the right.

What Is the 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 plain terms, this law means that as the price of an item goes up, suppliers will
attempt to maximize their profits by increasing the number of that item that they
sell.
Law of Supply Assumptions
The term “other things remaining the same” refers to the following assumptions
in the law of supply:
No change in the state of technology.
No change in the price of factors of production.
No change in the number of firms in the market.
No change in the goals of the firm.
No change in the seller’s expectations regarding future prices.
No change in the tax and subsidy policy of the products.7
No change in the price of other goods.
Supply Schedule
Supply Schedule is a tabular presentation of various combinations of price and
quantity supplied by the seller or producer during a period of time.
The given schedule shows positive relationship between price and quantity
supplied of a commodity. In the beginning, when the price is Rs.10 per kg,
quantity supplied by the seller is 1kg. As the price increases from Rs.10 per kg to
Rs.20 per kg and then to Rs.30 per kg, the quantity supplied by the seller also
increases from 1 kg to 2 kg and then to 3 kg respectively.

Supply curve
The supply curve is a graphical representation of a supply schedule.
Elasticity of Demand
To begin with, let’s look at the definition of the elasticity of demand: “Elasticity of
demand is the responsiveness of the quantity demanded of a commodity to
changes in one of the variables on which demand depends. In other words, it is
the percentage change in quantity demanded divided by the percentage in one
of the variables on which demand depends.”
The variables on which demand can depend on are:
Price of the commodity
Prices of related commodities
Consumer’s income, etc. Let’s look at some examples:
The price of a radio falls from Rs. 500 to Rs. 400 per unit. As a result, the
demand increases from 100 to 150 units.
Due to government subsidy, the price of wheat falls from Rs. 10/kg to Rs. 9/kg.
Due to this, the demand increases from 500 kilograms to 520 kilograms.
In both cases above, you can notice that as the price decreases, the demand
increases. Hence, the demand for radios and wheat responds to price changes.
Types of Elasticity of Demand
Based on the variable that affects the demand, the elasticity of demand is of the
following types. One point to note is that unless otherwise mentioned, whenever
the elasticity of demand is mentioned, it implies price elasticity.
Price Elasticity
The price elasticity of demand is the response of the quantity demanded to
change in the price of a commodity. It is assumed that the consumer’s income,
tastes, and prices of all other goods are steady. It is measured as a percentage
change in the quantity demanded divided by the percentage change in price.
Therefore,
income Elasticity
The income elasticity of demand is the degree of responsiveness of the quantity
demanded to a change in the consumer’s income. Symbolically,

Cross Elasticity
The cross elasticity of demand of a commodity X for another commodity Y, is the
change in demand of commodity X due to a change in the price of commodity Y.
What is Market Equilibrium?
Market Equilibrium is a situation where the price at which quantities demanded
and supplied are equal (Supply = Demand). When the market is in equilibrium,
there is no tendency for prices to change.
Market system is driven by two forces, which are demand and supply. This is
because these two forces play a crucial role in determining the price at which a
product is sold in the market. Price is determined by the interaction of demand
and supply in a market.
According to the economic theory, the price of a product in a market is
determined at a point where the forces of supply and demand meet. The point
where the forces of demand and supply meet is called equilibrium point.
Let us understand the concept of market equilibrium with the help of an
example.
Table shows the demand and supply of fans in Delhi at different price levels.

Price Supply Demand

(₹ per fan) (‘000 in a month) (‘000 in a month)

600 55 80

650 65 75

700 70 70

750 75 50

Table 1: Demand and supply of fans in Delhi

In Table 1, it can be observed that at the price of ₹700, the demand and supply
of fans is equal i.e. 70,000 fans. Therefore, market equilibrium exists at 70,000
where demand and supply are the same. Figure 1 shows the market equilibrium
of demand and supply of fans mentioned in Table