Question Answer

● It is that state of the market when the supply and

demand of a product balance each other which in turn
causes the prices of that product to stabilize.
● The concept of market equilibrium is very important for
a free market economy as prices in free markets always
tend toward equilibrium.
● However, the monopolistic tendencies or cartelization
hampers this process and that is why we see the
necessity of bodies like the competition commission of
India.
● The following diagram represents the market
equilibrium:
1. What do you mean by market
equilibrium?

● The point where the demand curve is equal to the

supply curve and determines the equilibrium price P and
the equilibrium quantity Q is known as the market
equilibrium.

Meaning:
Public goods refer to those goods which satisfy the public’s
wants. The main attribute of a public good is that it is supplied
by the government jointly for the entire public.
Features:
The main features of public goods are non-exclusion,
nonrivalry, and indivisibility:
● Principle of non-exclusion: In the case of public
goods, they are collectively supplied to all sections of
2. What do you mean by public goods?
the community.
● Principle of Indivisibility: In the case of public goods,
they are indivisible i.e., they cannot be divided to
confine the supply to a selected people.
● Non-rivalry: Consumption of public goods is non-rival.
This means that the use of public goods for some
people doesn’t reduce their availability to others.
Examples:

3. What do you mean by the Price
elasticity of demand?
4. Discuss different degrees of price
elasticity of demand.
5. What do you mean by cross
elasticity of demand?
Examples of public goods are defense services, pollution
control, streetlight, etc.
The price elasticity of demand commonly known as the
elasticity of demand refers to the responsiveness and
sensitiveness of demand for a product to the changes in its
price. In other words, the price elasticity of demand is equal
to:
Ep= Percentage change in quantity
demanded/Percentage change in price
The different degrees of price elasticity of demand is as
follows:
Perfectly elastic demand
Perfectly elastic demand is said to happen when a little change
in price leads to an infinite change in quantity demanded. A
small rise in price on the part of the seller reduces the demand
to zero. In such a case the shape of the demand curve will be
a horizontal straight line.
Unitary elastic demand
The demand is said to be unitary elastic when a given
proportionate change in the price level brings about an equal
proportionate change in quantity demanded. The numerical
value of unitary elastic demand is exactly one i.e. Marshall
calls it unit elastic.
Perfectly Inelastic demand:
Perfectly inelastic demand is the opposite of perfectly elastic
demand. Under the perfectly inelastic demand, irrespective of
any rise or fall in the price of a commodity, the quantity
demanded remains the same. The elasticity of demand in this
case will be equal to zero (ed = 0).
Relatively elastic demand
Relatively elastic demand refers to a situation in which a small
change in price leads to a big change in quantity demanded.
In such a case elasticity of demand is said to be more than
one (ed > 1).
Relatively inelastic demand
Under the relatively inelastic demand, a given percentage
change in price produces a relatively less percentage change
in quantity demanded. In such a case elasticity of demand is
said to be less than one (ed < 1).
● The cross elasticity of demand refers to the
percentage change in quantity demanded of one
commodity as a result of a small change in the price of
another commodity. This type of elasticity usually arises
in the case of inter-related goods such as substitutes
and complementary goods.

6. What do you mean by Income
elasticity of demand?
7. What do you mean by Unrelated
goods?
8. What do you mean by Interrelated
goods?
9. What do you mean by Final goods?
● The cross elasticity of demand for goods X and goods Y
can be expressed as
● Ec= Percentage change in quantity demanded of
good X/Percentage change in the price of good Y.
The degree of responsiveness of a change in demand for a
product due to the change in income is known as the income
elasticity of demand.
The formula to compute income elasticity of demand is as
follows:
Ey= Percentage change in quantity demanded of a
product/Percentage change in income.
Goods are said to be unrelated when demand for one is
independent of any change in the price of the other. Demand
for bags, for example, is not affected by a change in the price
of oils. Oils and bags are unrelated goods.
● Interrelated goods are the goods whose demand is
influenced by some other goods. It can be of two types
called substitute goods and complementary goods.
● Substitute goods are the goods that can be used in
place of each other to satisfy a want. For example-
coffee and tea, Pepsi and coca-cola, etc.
● Complementary goods are the goods that are to be
used together to satisfy a want. For example- a car and
petrol, ink and pen, etc.
● The demand for a commodity moves in the opposite
direction of the cost of its complementary commodities.
In contrast to the supplements, the commodities like
coffee and tea are not utilised together. They are
alternatives to each other.
● Final goods are referred to as those goods which do
not require further processing. These goods are also
known as consumer goods and are produced for direct
consumption by the end consumer.
● In simple words, final goods are commodities that are
manufactured by a company for subsequent
consumption by the consumer. These goods satisfy
consumer needs or want.
● Final goods consist of :
○ Goods that are purchased by the households are
meant for final consumption. For example,
television, milk, ready-to-eat foods, medicines.
○ Goods that are purchased by firms for investment
purposes or capital formation.
 ● Engel's Law is a 19th-century observation that as
household income increases, the percentage of that
income spent on food declines on a relative basis.
● This is because the amount and quality of food a family
10. Discuss Engel’s law.
can consume in a week or month are fairly limited in
price and quantity.
● As food consumption declines, luxury consumption and
savings increase in turn.

● The Law Of Diminishing Marginal Utility states that

all else equal as consumption increases the marginal
utility derived from each additional unit declines.
Marginal utility is derived as the change in utility as an
11. What do you mean by the law of
additional unit is consumed.
diminishing marginal utility?
● Utility is an economic term used to represent
satisfaction or happiness. Marginal utility is the
incremental increase in utility that results from the
consumption of one additional unit.

Various factors affect the elasticity of demand. Some of them

are mentioned below:
1. Nature of the commodity: The elasticity of demand
for a commodity is influenced by its nature. A
commodity for a person may be a necessity, a comfort,
or a luxury.
● When a commodity is a necessity like food grains,
vegetables, medicines, etc., its demand is
generally inelastic as it is required for human
survival and its demand does not fluctuate much
with a price change.
● When a commodity is a comfort like a fan,
refrigerator, etc., its demand is generally elastic
12. What are the different factors as consumers can postpone its consumption.
influencing the elasticity of demand? ● When a commodity is a luxury like AC, DVD
player, etc., its demand is generally more elastic
as compared to the demand for comforts.
● The term ‘luxury’ is a relative term as any item
(like AC), maybe a luxury for a poor person but a
necessity for a rich person.
2. Availability of substitutes: Demand for a commodity
with a large number of substitutes will be more elastic.
The reason is that even a small rise in its prices will
induce the buyers to go for its substitutes. For example,
a rise in the price of Pepsi encourages buyers to buy
Coke and vice-versa. Thus, the availability of close
substitutes makes the demand sensitive to change in
prices. On the other hand, commodities with few or no
 substitutes like wheat and salt have less price elasticity
of demand.
3. Income level: Elasticity of demand for any commodity
is generally less for higher-income level groups in
comparison to people with low incomes. It happens
because rich people are not influenced much by
changes in the price of goods. But, poor people are
highly affected by an increase or decrease in the price
of goods. As a result, the demand for the lower-income
group is highly elastic.
4. Level of price: The level of price also affects the price
elasticity of demand. Costly goods like laptops, Plasma
TV, etc. have highly elastic demand as their demand is
very sensitive to changes in their prices. However, the
demand for inexpensive goods like a needle, matchbox,
etc. is inelastic as a change in prices of such goods does
not change their demand by a considerable amount.
5. Postponement of consumption: Commodities like
biscuits, soft drinks, etc. whose demand is not urgent,
have highly elastic demand as their consumption can be
postponed in case of an increase in their prices.
However, commodities with urgent demand like
life-saving drugs, have inelastic demand because of
their immediate requirement.
6. The number of uses: If the commodity under
consideration has several uses, then its demand will be
elastic. When the price of such commodity increases,
then it is generally put to only more urgent uses and, as
a result, its demand falls. When the prices fall, then it is
used for satisfying even less urgent needs, and demand
rises. For example, electricity is a multiple-use
commodity. A fall in its price will result in a substantial
increase in its demand, particularly in those uses (like
AC, Heat convector, etc.), where it was not employed
formerly due to its high price. On the other hand, a
commodity with no or few alternative uses has less
elastic demand.
7. Habits: Commodities, which have become habitual
necessities for the consumers, have less elastic
demand. It happens because such a commodity
becomes a necessity for the consumer and he continues
to purchase it even if its price rises. Alcohol, tobacco,
cigarettes, etc. are some examples of habit-forming
commodities.

13. How do Surplus and Shortage drive ● Surplus and shortage:

towards market equilibrium in a free ● If the market price is above the equilibrium price, the
 market? quantity supplied is greater than the quantity
demanded, creating a surplus. The market price will
fall.
● For example: if you are the producer, you have a lot of
excess inventory that cannot sell. Will, you put them on
sale? It is most likely yes. Once you lower the price of
your product, your product’s quantity demanded will
rise until equilibrium is reached. Therefore, surplus
drives prices down.
● If the market price is below the equilibrium price, the
quantity supplied is less than the quantity demanded,
creating a shortage. The market is not clear. It is in
shortage. The market price will rise because of this
shortage.
● For example: if you are the producer, your product is
always out of stock. Will you raise the price to make
more profit? Most for-profit firms will say yes. Once you
raise the price of your product, your product’s quantity
demanded will drop until equilibrium is reached.
Therefore, shortage drives prices up.
● If a surplus exists, the price must fall in order to entice
additional quantity demanded and reduce quantity
supplied until the surplus is eliminated. If a shortage
exists, the price must rise in order to entice additional
supply and reduce the quantity demanded until the
shortage is eliminated.

Factor income is income received from the factors of

production: the inputs used in the production of goods or
14. What do you mean by factor
services to make an economic profit. Factor income on the use
income?
of land is called rent, income generated from labor is called
wages, and income generated from capital is called interest.
 Determinants of supply:
Supply can be influenced by a number of factors that are
termed as determinants of supply. Generally, the supply of a
product depends on its price and cost of production. In simple
terms, supply is the function of price and cost of production.
Some of the factors affecting supply are explained below:
Price
● If the price of a product increases, then the supply of
the product also increases and vice versa. Change in
supply with respect to the change in price is termed as
the variation in the supply of a product.
15. What are the determinants of
Cost of production
supply?
● Implies that the supply of a product would decrease
with an increase in the cost of production and vice
versa. The supply of a product and the cost of
production is inversely related to each other.
● The cost of production rises due to several factors, such
as loss of fertility of the land, high wage rates of labour,
and increase in the prices of raw material, transport
cost, and tax rate.
Natural conditions
● Implies that climatic conditions directly affect the supply
of certain products. For example, the supply of
 agricultural products increases when the monsoon
comes on time and decreases due to droughts or floods.
Technology
● A better and advanced technology increases the
production of a product, which results in an increase in
the supply of the product.
● For example, the production of fertilizers and
good-quality seeds increases the production of crops.
This further increases the supply of food grains in the
market.
Transport conditions
● Transport is always a constraint to the supply of
products, as the products are not available on time due
to poor transport facilities. Therefore even if the price of
a product increases, the supply would not increase.
Factor prices and their availability
● Act as one of the major determinants of supply. The
inputs, such as raw material man, equipment, and
machines, required at the time of production are termed
as factors. If the factors are available in sufficient
quantity and at a lower price, then there would be an
increase in production.
● This would increase the supply of a product in the
market. For example, the availability of cheap labour
and raw material nearby the manufacturing plant of an
organization would help in reducing labour and
transportation costs. Consequently, the production and
supply of the product would increase.
Prices of related goods
● Refer to the fact that the prices of substitutes and
complementary goods also affect the supply of a
product.
● For example, if the price of wheat increases, then
farmers would tend to grow more wheat than needed.
This would decrease the supply of rice in the market.
Government policies
● This implies that the different policies of the
government, such as fiscal policy and industrial policy,
have a greater impact on the supply of a product.

● The snob effect is a phenomenon described in

microeconomics as a situation where the demand for a
certain good by individuals of a higher income level is
16. What is the Snob effect? inversely related to its demand by those of a lower
income level.
● The "snob effect" contrasts most other microeconomic
models, in that the demand curve can have a positive
 slope, rather than the typical negatively sloped demand
curve of normal goods.

There are certain exceptions to the law of demand. Some

important exceptions are discussed below:
1. Snob Appeal or Veblen good:
● People sometimes buy certain commodities like
diamonds at high prices not due to their intrinsic
worth but for a different reason. The basic object
is to display their riches to the other members of
the community to which they themselves belong.
● This is known as ‘snob appeal’, which induces
people to purchase items of conspicuous
consumption.
● Such a commodity is also known as Veblen good
(named after the economist Thorstein Veblen)
whose demand rises (falls) when its price rises
(falls).
2. Giffen Good:
● A ‘Giffen good’ is a special variety of inferior
17. What are the exceptions to the law goods. Sir Robert Giffen of Scotland observed in
of demand? the 19th century (the 1840s) that poor people
spent the major portion of their income on a
staple item, viz., potato.
● If the price of this good rises they will become so
poor that they will be found to spend less on
other items and buy more potatoes in order to
get a minimum diet and keep themselves alive.
● For such goods, the demand curve will be upward
sloping.
3. Highly Essential Goods:
● Finally, in the case of certain highly essential
items such as life-saving drugs, people buy a
fixed quantity at all possible prices.
● Heart patients will buy the same quantity of
essential medicine whether the price is high or
low. Their response to price change is almost nil.
● In the case of such commodities, the demand
curve is likely to be a vertical straight line.

● As a general rule, the supply curve slopes upwards,

showing that the quantity supplied rises with a rise in
18 . What are the exceptions to the law price. However, in certain cases, the positive
of supply? relationship between supply and price may not hold
true.
● The various exceptions to the law of supply are:
 1. Future Expectations: If sellers expect a fall in price in
the future, then the law of supply may not hold true. In
this situation, the sellers will be willing to sell more
even at a lower price. However, if they expect the price
to rise in the future, they would reduce the supply of
the commodity, in order to supply the commodity later
at a high price.
2. Agricultural goods: The law of supply does not apply
to agricultural goods as their production depends on
climatic conditions. If due to unforeseen changes in
weather, the production of agricultural products is low,
then their supply cannot be increased even at higher
prices.
3. Perishable goods: In the case of perishable goods,
like vegetables, fruits, etc., sellers will be ready to sell
more even if the prices are falling. It happens because
sellers cannot hold such goods for long.
4. Rare Articles: Rare, artistic, and precious articles are
also outside the scope of the law of supply. For
example, the supply of rare articles like paintings of the
Mona Lisa cannot be increased, even if their prices are
increased.
5. Backward countries: In economically backward
countries, production and supply cannot be increased
with rising prices due to a shortage of resources.

Basis of Movement along The shift in the

Difference the demand demand curve
curve

Meaning Movement in the The shift in the

demand curve is demand curve is
19 . What do you mean by the when the when the price of
movement along the demand curve commodity the commodity
and shift in the demand curve? experiences remains constant,
changes in both but there is a
the quantity change in quantity
demanded and demanded due to
price, causing the some other
curve to move in a factors, causing
specific direction. the curve to shift
to a particular side
 Curve

What is it Change along the Change in the

curve. position of the
curve.

Determinant Price Non-Price such as

income, tastes,
and preferences,
etc.

Indicates Change in Change in Demand

Quantity
Demanded

Result Demand Curve will Demand Curve will

move upward or shift rightward or
downward. leftward

● Microeconomics is specific and smaller in scale, looking

at the behavior of consumers, the supply and demand
equation in individual markets, and the hiring and
wage-setting practices of individual companies.
● Macroeconomics has a broader focus, such as the
impact of fiscal policy, big picture causes of
unemployment or inflation, and how government
actions impact nationwide economic growth.
● Because microeconomics focuses on the behavior of
20. Discuss the relation between small units of the economy, it tends to limit itself to
microeconomics and macroeconomics. specific and specialized areas of study. This includes the
balance of supply and demand in individual markets,
the behavior of individual consumers (which is referred
to as consumer theory), workforce demand, and how
individual companies determine wages for their
workforces.
● Macroeconomics has a much broader reach than
microeconomics. Prominent areas of research in the
field of macroeconomics concern the implications of
fiscal policy, locating the reasons for inflation or
unemployment, the implications of government
 borrowing, and economic growth on a nationwide scale.
Macroeconomists also examine globalization and global
trading patterns and perform comparative studies
between different countries in areas such as living
standards and economic growth.

● The change in quantity demanded of a commodity may

take the form of expansion or contraction in demand.
● Expansion in demand takes place when with a fall in the
price of a commodity, the quantity demanded rises.
● Conversely, with a rise in the price of a commodity, its
quantity demanded falls.
● Expansion and contraction in demand can be
represented in the form of a movement on a demand
curve, as shown in the following figure:

21. What do you mean by Expansion

and Contraction in Demand?

Explanation:
● On the X-axis quantity demanded of a commodity is
measured and on the Y-axis price of the commodity is
measured in rupees.
● DD is the demand curve. At point ‘a’ on the demand
curve, we find that at price OP, OQ of a commodity is
demanded. As the price falls to OP2, demand becomes
OQ2.
● This movement from point a to point c on the demand
curve DD is referred to as ‘expansion in demand’.
● It is also indicated by the arrow from a to c.
● Similarly, when the price of a commodity rises to OP1,
demand falls to OQ1.
● Thus the movement from a to b on the demand curve
DD is known as ‘contraction in demand’.

● Opportunity costs represent the potential benefits an

individual, investor, or business misses out on when
choosing one alternative over another. Because by

22. What do you mean by 'Opportunity
cost’ in economics?
23 . What is microeconomics?
24 . What is Macroeconomics?
definition they are unseen, opportunity costs can be
easily overlooked. Understanding the potential missed
opportunities foregone by choosing one investment over
another allows for better decision-making.
● The formula for calculating an opportunity cost is simply
the difference between the expected returns of each
option. Say that you have option A—to invest in the
stock market hoping to generate capital gain returns.
Meanwhile, Option B is to reinvest your money back
into the business, expecting that newer equipment will
increase production efficiency, leading to lower
operational expenses and a higher profit margin.
● Microeconomics is the study of decisions made by
people and businesses regarding the allocation of
resources, and prices at which they trade goods and
services. It considers taxes, regulations, and
government legislation.
● Macroeconomics studies the behavior of a country and
how its policies impact the economy as a whole. It
analyzes entire industries and economies, rather than
individuals or specific companies, which is why it's a
top-down approach. It tries to answer questions such
as, "What should the rate of inflation be?" or "What
stimulates economic growth?"
● Macroeconomics focuses on aggregates and
econometric correlations, which is why governments
and their agencies rely on macroeconomics to formulate
economic and fiscal policy.