Foundations of Micro/Macroeconomics · Demand & Supply Laws · Elasticity · Market Structures — BPSC / BSSC
Economics is the Science of Wealth — how society allocates scarce resources (land, labour, capital) to produce output (goods and services).
Demand for a commodity = Desire + Willingness to buy + Ability to Purchase, for Satisfaction (Utility)
There exists an inverse relationship between price and demand, assuming other factors remain constant.
Example: When price is ₹1, quantity demanded is 3 units. When price is ₹3, quantity demanded is 1 unit.
| Type of Good | Income Effect | Price Effect |
|---|---|---|
| Normal Goods | Positive (+): As income ↑, demand ↑ | Negative (–): As price ↑, demand ↓ |
| Inferior Goods | Negative (–): As income ↑, demand ↓ | — |
| Giffen Goods | Negative (–): As income ↑, demand ↓ | Positive (+): As price ↑, demand ↑ |
Elasticity of Demand: Change in quantity demanded due to change in price (or income, or price of related goods).
Measures change in quantity demanded of a commodity with respect to changes in buyer's income.
Measures the percentage change in quantity demanded of one good (A) in response to a percentage change in price of another related good (B).
Measures changes in quantity demanded of a commodity with respect to changes in its own price.
| Type | Description |
|---|---|
| Perfectly Elastic Demand | Without any change or little change in price — expansion/contraction of demand to any extent |
| Perfectly Inelastic Demand | When price changes — no change in demand |
| Unitary Elastic Demand | % change in price = % change in demand |
| Relatively Elastic Demand | % change in quantity demanded is greater than % change in price |
| Relatively Inelastic Demand | % change in demand is less than % change in price |
Supply: Quantity of goods that a producer is willing to sell at different prices at a given time.
An increase in the money supply generally leads to an increase in overall economic activity/value in the economy. There is an inverse relationship between interest rate and demand for money.
| Market Form | Key Features |
|---|---|
| Perfect Competition | Large number of buyers and sellers · Free entry and exit of firms · Homogeneous goods · Same price · Price determined by demand and supply (market forces) |
| Monopoly | Only one seller · No close substitutes · Restrictions on entry of firms · Complete control over price · Demand curve less elastic than monopolistic competition |
| Monopolistic Competition | Many buyers and sellers · Seller's product differs from others · Product differentiation (colour, design, size, etc.) |
| Oligopoly | Limited number of firms · Large number of buyers · Barriers to entry (not easy) · Price/output decisions of one firm affect others |
| Topic | Key Fact |
|---|---|
| Father of Economics | Adam Smith (Scotland, Britain) |
| Economics Etymology | Greek "Oikonomia" (Oikos = House, Nomos = Management) |
| Adam Smith's Book | An Inquiry into the Nature and Causes of the Wealth of Nations (1776) |
| First Systematic Demand-Supply Theory | Alfred Marshall (1890) — Principles of Economics |
| Microeconomics | Study of individual units (firm, industry, market) |
| Macroeconomics | Study of overall economy (national income, unemployment, poverty) |
| Law of Demand | Inverse relationship between price and demand |
| Giffen Goods | Exception to Law of Demand: demand increases as price increases |
| Veblen Goods | Prestige/index items — expensive cars, iPhone, etc. |
| Normal Goods | Income Effect (+), Price Effect (–) |
| Inferior Goods | Income Effect (–) |
| Giffen Goods (Effects) | Income Effect (–), Price Effect (+) |
| Income Elasticity | Ey = % change in demand ÷ % change in income |
| Cross Elasticity | Ec = % change in qty demanded of A ÷ % change in price of B |
| Price Elasticity | Ep = % change in demand ÷ % change in price |
| Law of Supply | Positive relationship between price and supply |
| Supply Curve | Generally upward sloping |
| Market Equilibrium | Market Demand = Market Supply (no excess supply) |
| Perfect Competition | Large buyers/sellers; homogeneous goods; price by market forces |
| Monopoly | One seller; no close substitutes; complete price control |
| Monopolistic Competition | Many sellers; differentiated products |
| Oligopoly | Limited firms; barriers to entry; interdependence of firms |