Q.1. State the law of Demand and explain with diagram.

What are the exceptions of the

Law?

The law of demand expresses a relationship between the quantity demanded and its price.
Demand in economics is the effective demand which is defined as the willingness to have
something backed by the purchasing power Law of Demand may be stated as : Higher the price
lower will be the quantity demanded of a commodity and vice versa other things remaining
constant during a particular period of time. The quantity of a commodity that a particular person
is willing to purchase at any period of time depends on the price of the commodity itself, prices
of related goods, his income, his tastes and preferences, wealth, direct taxes etc. If we vary the
price of the commodity under consideration keeping all other influencing factors constant, we get
the demand schedule of the consumer. The graphical presentation of an individual’s demand
schedule gives the individual’s demand curve.

Given these assumptions, the law of demand is explained in terms of Table 3 and Figure 7.

The above table shows that when the price of orange, is Rs. 5 per unit, 100 units are demanded. If the
price falls to Rs.4, the demand increases to 200 units. Similarly, when the price declines to Re.1, the
demand increases to 600 units. On the contrary, as the price increases from Re. 1, the demand
continues to decline from 600 units.

In the figure, point P of the demand curve D-D1 shows demand for 100 units at the Rs. 5. As the price
falls to Rs. 4, Rs. 3, Rs. 2 and Re. 1, the demand rises to 200, 300, 400 and 600 units respectively. This is
clear from points Q, R, S, and T. Thus, the demand curve DD1 shows increase in demand of orange when
its price falls. This indicates the inverse relation between price and demand.
Exceptions to the Law of Demand:

 Giffen goods - Giffen goods are those goods who demand rises as their price rises.
 Future price expectation
 High status goods
Q.2) State the Law of Supply and explain with diagram.
• Law of Supply may be stated as: Higher the price higher will be the quantity supplied and
vice versa, other factors remaining constant. ‘Other factors’ are the prices of factors of
production, technique of production, condition of weather, indirect taxes etc.
Supply function may be expressed as:Qs = f( Px, f1, f2,…..,f3,T, I.T.,W etc.)
. Qs = f( Px) and Qs & Px are directly related.

A specific supply function may be presented as: Qs = 30 + 2P explaining a positive relation

between Qs and P
Supply Curve

• Corresponding to different values of P, values of Qs may be calculated from the following

function Qs = 30 + 2P
• (32,3), (34,2),(36,1),…these combinations satisfy the above function
P

S 34 36 Q

3. How will be the equilibrium established in the market place by interaction of Supply and Demand
forces?

Equilibrium through the Interaction of Demand& Supply

As we place supply and demand curves together they intersect at E

Pe

Pe

D
 Qe Q

Pe= Equilibrium Price

Qe= Equilibrium Quantity

Adjustment

• If P> Pe ,there will be excess supply, as a result price will fall

• If P< Pe ,there will be excess demand, as a result price will increase
• When P= Pe there will be no excess supply or excess demand, P e and corresponding quantity Qe are the
equilibrium price and quantity
Change in Equilibrium

Equilibrium price & quantity may change due to:

– Increase or decrease in demand

– Increase or decrease in supply
-- both the above

Sample questions – Set - 1

1. State the law of Demand and explain with diagram. What are the exceptions of the Law?

2. State the Law of Supply and explain with diagram.

3. How will be the equilibrium established in the market place by interaction of Supply and Demand
forces?

4. How do you explain the concepts of Elastic, Inelastic and Unitary elastic demand?

5. a) Calculate the Price Elasticity in the following case:

Price Quantity Demanded

Rs. 5 20,000 units
Rs.3 60,000 units
b) What can you understand about the nature of the commodity from the value you get in the above
case.

6. Distinguish between “Change in Quantity Demanded” and “Change in Demand”.

7. How can there be Change in Equilibrium?

8. How does the short run producer take decision regarding employment of the variable factor?

Or

What is the most relevant stage of production for the short run producer?

9. How does the long run producer take decision regarding employment of the various factors of
production to achieve his objective?

Or

How does the long run producer achieve his objective of

a) Output maximization subject to fixed cost

b) Cost minimization subject to specific fixed output?

10. Short notes:

i) Excess Demand

When at the current price level, the quantity demanded is more than quantity supplied, a situation of
excess demand is said to arise in the market. Excess demand occurs at a price less than the equilibrium
price. Since the prices would decrease, it would act as a bait for buyers to flock in markets which would
lead to competition among these buyers.
This competition would lead to an increase in prices. As the prices increase the law of demand will
operate to decrease the demand and the buyers will start vanishing. Conversely, this increase in prices
would lure the suppliers to increase supply with hopes to earn greater profits.
Such a decrease in demand and increase in supply resulted by an effective increase in prices continues
until the equilibrium level is attained. Thus automatically the conditions of excess demand are wiped out
of the market.
ii) Excess Supply:

Excess supply is a market condition when the quantity supplied is greater than the demand for a
commodity at the prevailing market price. It occurs at a price greater than the equilibrium price level. As
the price will be greater than the equilibrium price the sellers would sense this as an opportunity to earn
greater profits and would pump in the supply.
This would lead to an effective increase in stocks and a tough competition among the sellers to sell their
respective supplies. Consequently, to sell more supply, suppliers would start decreasing the prices to sell
the excess stock. This decrease in price manoeuvres the market supply and market demand which fall
(law of supply) and rise (law of demand) respectively.
This self-adjusting mechanism pulls the price back to the equilibrium level. Effectively excess supply is
wiped out of the market.

iii) Giffen Goods:

A Giffen good is a low income, non-luxury product for which demand increases as the price increases
and vice versa.
A Giffen good has an upward-sloping demand curve which is contrary to the fundamental laws of
demand which are based on a downward sloping demand curve.
Demand for Giffen goods is heavily influenced by a lack of close substitutes and income pressures.
Veblen goods are similar to Giffen goods but with a focus on luxury items.

iv) Price Elasticity:

ELASTICITY OF DEAND

Elasticity of demand measures the degree of responsiveness of quantity demanded to price changes as
this degree of responsiveness is not same for all types of goods even if demands for the goods obey the
Law of Demand. The coefficient of price elasticity of quantity demanded is defined as the percentage
change in quantity demanded by the percentage change in price.
e = percentage change in quantity demanded / percentage change in price
Elasticity coefficient measures the degree of responsiveness of quantity demanded to price changes but
the degree of responsiveness is not same for all types of goods even if demand for the goods obey Law
of Demand.
The value of ‘e’ indicates the nature of the commodity.
Value of ‘e’ may be greater than, less than or equal to 1.
When e > 1, the commodity is a luxury good,
When e < 1, the commodity is an essential good and
When e = 1, the commodity is neither essential nor luxury but its use gives some comfort.

v) Production

vi) Production Function

vii) Isoquant

viii) Isocost