Demand and Supply Curve

- Changes in graph

- Always draw the graph to get the correct answer

Price Elasticity of Demand

- Price Elasticity of demand = % change in Quantity Demanded//%change in price
- Adjustment and change of demand

- When the change in price results in a greater percentage change in demand

- The degree of which demand can expand and contract (increase and decrease in
quantity demanded) due to change in price or in response to change in price

- The degree of responsiveness of demand (quantity demanded) to a change in price

- Negative p.e.d just shows opposite direction

- p.e.d= -6 (elastic) this is because a 1% increase in price cause a 6% decrease in price

so its responding to the price increase

- p.e.d=-0.45 (inelastic) this is because a 1% increase in price cause a 0.45% decrease

in price so its not responding to the price increase

- p.e.d= in nity (perfectly price elastic)

- p.e.d= 0 (perfectly price inelastic)

- p.e.d=1 (unitary price elasticity)

- Types of elasticity:

• Special cases of elasticity: Perfectly inelastic, unitary (when change in price causes the
same percentage change in quantity demanded. p.e.d=1 or -1), perfectly elastic

• Elastic: 1% change in price causes more than 1% increase or decrease in demand

• Inelastic: 1% change in price causes less than 1% increase or decrease in demand

*Total Revenue: Price X Quantity

Determinants of P.E.D
- Availability of substitutes - More availability, more elastic

- Proportion of income spent - The lesser the proportion of income spent on the product
the lesser responsive the product demand will be to the changes in price. Reason:
consumption change in income will be so insigni cant to consumers disposable
income (after tax income to consume or save)

- Necessity

- Habits, Addiction, Fashion

- Time- Short term: Elastic , long term: Inelastic

https://www.investopedia.com/terms/e/inelastic.asp

Total Revenue
- Full amount of total sale of goods and services

- Price X Quantity

- Proceeds from sale of a product or a service

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Relationship between Total Revenue and P.ed
- Elastic demand with price increase -> Total Revenue falls

- Elastic demand with price decrease -> Total Revenue increases

- InElastic demand with price decrease -> Total Revenue decreases

- InElastic demand with price increase -> Total Revenue increases

- Unitary Elastic-> Remains same with all price changes

- Elastic demand-> Area under the graph increases

- Inelastic demand -> Area under the graph decreases

Impact of change in p.e.d on decision makers

- Producers

- Government- To reduce the consumption of demerit goods since their p.e.d is high
(highly inelastic), government likes to tax those products more. They can also think like
a producer. Government also likes to tax inelastic demand products more like petrol

*Demerit goods are goods that the government would like to reduce consumption of. For
example: tobacco

*Producers utilise or create synergy between factors of production (CELL) to products.

They want to have knowledge of p.e.d so that they know what to produce, which to
produce so that they can maximise pro ts

*Suppliers are people who are willing and able to sell certain units of a commodity at a
certain price

Price Discrimination
- Depending on p.e.d of consumers producers charge di erent prices for same good/
service from di erent consumers.

- Plane examples and train

Price Elasticity of Supply

- Degree of responsiveness to change in quantity supplied to changes in price

- How does for example 1% change in price supplied a ect the quantity demanded

- Supply is said to be price elastic when the producer is able to easily increase the
supply more in response to price changes

- Elastic: Percentage change in quantity supplied is greater than the percentage change
in price

- % change in Quantity Supplied/ % change in price

https://www.economicsonline.co.uk/Competitive_markets/
Price_elasticity_of_demand.html

Determinants of p.e.s
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- Acronym: FIRST

- F: Factor substitution: The same machine can be used for other things as well. This
increases elasticity (becomes more elastic) as when the price increases, the supplier
will be able to supply more. If you are able to replace the factors of production then the
elasticity will be high

- I: Inventory: Larger the inventory, larger the elasticity. For example: Suzuki supplies
motorcycles. Sudden rise in price during the festive season. Such increase in price can
be utilised by selling more units (i.e low supply) so large inventory is bene cial

- R: Rivals: Barriers to entry. If more rivals, higher the elasticity. For example: Dominos,
Pizza Hut, local seller etc (multiple options) (has no barriers of entry). Sudden increase
in price, quantity supplied can be increased because more producers will enter and
increase the total supply.

- S: Spare capacity to produce: Crackers. In the times between festive season some
products are going to have huge demand or price rise. Suppliers need to keep huge
space capacities which might not be needed other time or year. So more elastic with
higher (spare) capacity to produce

- T: Time: Vegetables require time to produce (a few months) So supply cannot be

increased suddenly near harvest season. In short run, the supply is inelastic but in
the long run supply can be altered/increased as per price change. So more
elastic.

Decision makers of p.o.s

- A producer will like to sell a product which is elastic because they can increase the
units of sale even on a small price rise

- Spare Capacity: To be able to increase the supply in a short span of time you need
spare capacity. If as a producer, the commodity of sale is Elastic, you would like to
keep space capacity. For example: if one has excess demand (shortage) Demand >
Supply. During festive season or new product, having spare capacity for elastic
commodity will help producer
- Government would like to ensure equitable distribution for goods that are important
and necessary but they are inelastic. For example: Housing- if government feels
housing prices are getting high, it may intervene and set up an upper threshold beyond
which the price cannot be increased. Government can also build a ordable housing

- Elasticity will help knowing the extent to which wage rate (price) can impact the supply
of labour

Market Economic System

- Market: A place where buyers and sellers meet, set a price and the number of units
sold at a certain price

- Economic System: It is the system in which scarce resources are e ciently allocating
resources to satisfy wants and needs and resources utilised are scarce and have
alternate uses

Economic Agents
- Households or Individuals, Firms and the Government

- Decision makers in an economy

Free market system/ market economic system

- Individuals or Households make decisions in the economy

- Firms make decisions in the economy

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 - Pro t driven

- Market forces of demand and supply determine price and quantity

- Features:

• No government interference (minimal to no) in the economic system (supply and

consumption)

• The price and quantity are determined by the market forces of demand and supply

• Better standard of living

• More wealth creation

• Individuals, Households and rms are free to produce and consume whatever they want

• May be wealth discrimination

• So, producers will be able to maximise their pro t

- For ex: Hong Kong, Singapore, New Zealand, Japan

- Advantages:
• A lot of producers -> intense competition -> Increased quality and more choices

• Producers -> Free to produce based on pro t

• Less barriers to entry for producers

• Freedom to choose what to produce, how much to produce and for whom to produce

- Disadvantages:
• Necessary goods can have higher prices because mostly pro table goods are produced
(for example Hong Kong and Singapore have more luxury goods)

• Singapore: Housing -> necessity but prices are extra ordinary

• Economic inequality

• Unfair prices

• More demerit goods

• Since producers are free to produce whatever they want, they most likely will produce
stu that creates more pro t for them instead of goods that have a good impact on the
environment. For example: E-waste

• Monopolise -> higher prices

- In a free market system, merit and public goods will not be provided as if left to the
market forces, demerit goods will be over provided, as they generate larger revenues
for businesses. Merit and public goods are goods that do not generate high revenues
for businesses, as they are provided at either free or very low prices to bene t the
public. If left to market forces they will not be provided by the market,

- Merit goods: an individual or society should have on the basis of some concept of
need, rather than ability and willingness to pay. Housing, education, healthcare

- Public goods: Public goods are commodities or services that bene t all members of
society, and which are often provided for free through public taxation. For example:
fresh air, knowledge, lighthouses, national defence, ood control systems, and street
lighting

- A public good is often (though not always) under-provided in a free market because its
characteristics of non-rivalry and non-excludability mean there is an incentive not to
pay. In a free market, rms may not provide the good as they have di culty
charging people for their use

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 Centrally planned/ Planned economic system
- The government makes the decisions in the economy

- For example: North Korea, Venezuela, Cuba, Russia

Mixed economic system

- Where the decision making in an economic system is done both by private individuals
as well as the government

- For example: Australia, France, UAE, Italy

- A government aims to keep domestic prices stable by instituting a sales tax on

products produced by privately owned rms. The government belongs to a mixed
economic system, as there is a public sector as well as a private sector

- Co-existence of private and public sector

- Combination of socialism and communism

- Most countries use this system

- This system is good for essential goods

- How can the government intervene -> set minimum and maximum prices -> Taxation

Market Failure
- For example: Coal manufacturing -> Electricity -> Green house e ect emissions is negative
(negative externality)-> Global Temp increases-> Coastal areas a ected -> Cost to other ->
And these people are not involved in production and consumption Spillover E ect.
Government would want to tax you more in this case.

- Pro table -> Firecrackers -> negative externality -> A ects environment and citizens of the
region -> Other citizens not included -> Cost to others (people not involved in the production
and consumption) for example buying air puri ers, masks etc

- Cost to others: Others means people who are a ected even if they didn’t do it. For example:
People who have to buy air puri ers even though they didn’t burn crackers.

- Externality: If you are not directly involved in the production or consumption but it still has a
negative or positive impact on you

- Social cost= Private cost + External cost

- Covid vaccine -> Buy a vaccine (economic activity) -> Immunity to you/consumer -> the virus
doesn’t spread -> If majority take vaccine -> the disease is eradicated -> bene t to those who
haven’t paid for vaccine. This is a positive externality.

- Private cost: The amount you pay for a good or service price paid for consumption and price
paid for production

- External cost: Cost to other persons who are involved in the production process

- Market failure happed due to ine cient allocation (people want to produce pro table goods-
demerit goods) and positive or negative spillover e ect (people who are not directly involved in
the production or consumption but it still has a negative or positive impact on them)

- Private cost, external cost, social cost

- Private bene t, external bene t, social bene t

- Consequences of market failure is the overproduction of demerit goods and underproduction

of merit goods and abuse of monopoly power (eg. A company owns 65% of the share in a
market. That company can manipulate the price and supply) and factor immobility

Government Interventions
- Price control

- Indirect taxation- GST

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 - Subsidies

- Education and Awareness- UK government has issued travel advisory to its citizens
who are travelling to Sudan.

- Rules and Regulations. For example: The government imposes a lockdown, penalty
imposed on rms if there is poor quality or tra c rules disobeyed

- Privatisation: Transfer to ownership public to private. For ex- NTPC, state owned rms
was disinvested by Govt to meet budget de cit.

- Nationalisation: Transfer to ownership private to public. For ex- Air India nationalised in
1959. Indian banks were nationalised in 1969

*Disinvested- Govt has revenue (taxes and nes) and revenue expenditure (infrastructure
etc). When a government privatises or sells some stake of their company to meet their
de cit. When the expenditure is higher than the revenue generated there is a budget
de cit.

Direct Provision

- For example: Public parks, streetlights, defence, public schools, tra c lights (free
rider), public hospitals, low cost housing

- Bene t for the public

- Even after taxation, subsidies, rules there are certain public goods that must be
provided to all citizens

- Free Rider- Someone who has not paid for a particular commodity but is still bene ting
from it.

- Disadvantages????- Creates the problem of free riders. Free riders may not utilise the
provision e ciently

*Public goods- Non-rivalry, non-excludability. Public goods do not exclude anyone from
consumption and the consumption of something doesn’t reduce anyone else’s ability to
consume the same. For example: Streetlight

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Money

- Medium of exchange

Forms of Money

- Bank deposits

- Currency

- Central Bank Reserves:

• reserves held by central bank of a country to maintain stable money supply in an

economy.

• If commercial banks needs to borrow, they do it from central bank

• To increase money supply, often central backs lend money to commercial banks at low
interest rate

• The common public cannot borrow money from central banks

• Commercial banks can borrow

• The government can borrow

• Central Bank Reserves can borrow or restrict money supply from commercial banks

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Money creation by credit

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 Functions of Money

- Medium of exchange:

• readily accepted to sell, buy or exchange.

• For example: you can get a bottle of water in exchange of 20 rupee notes

• Overcame the di culty with double coincidence of wants (barter system)

- Measure of value:

• For example: 1kg of gold vs 1kg of cardboard. There is no di erence in the weight but
di erence in value

• Di erent commodities can be assigned value units of money

- Store of value:

• One can hold onto money and not lose much value

• For example: the value of a 10 rupee note won’t change in 10 days

• Money can possess value for longest terms. Money does not deteriorate

- Standard form of deferred payments

• Pushing forward a payment

• For example: Someone takes a car loan for 5 years of 5 lakhs. The person has the car
but he/she did not pay. That person has deferred payment

*Double coincidence of wants- Trade in absence of money

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Characteristics of Money

- Uniformity:

• All currencies of same denominations are uniform in shape and size

- Acceptability:

• Widely accepted

• old denominations are not accepted

• currencies/assets often accepted in many countries.

• For ex: Gold, $USD

- Durability:

• Made in a way to stay or last longer in circulation

• Why not silver for coins then?

• It’s a more scarce resource. Coins do not need to have intrinsic value

- Portability:

• Easily carried and useful for small transactions (cash and coins)

• For large transactions, one can use bank deposits (online, debit cards, credit cards)

• Divisibility:

• For ex: asking for 1/3 of a cow is not useful in exchange of 2/3 of a chicken is not useful
to both traders

• Later, salt and sea shells were used but lacked in the sense of scarcity

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 - Scarcity:

• Unlimited money will lead to losing out on the value possessed by money

• That is why silver and gold coins are better forms of money

• For ex: Zimbabwe and Venezuela currencies lost their value

- Stability:

• Money should not change value everyday

Bank

- Accepts deposits from people (depositors)

- Provides mortgage/ credit to the public (borrower)

- Interest earned for depositors (public) with low interest rate

- Interest paid by borrowers (public) with high interest rate

- The di erence between the interest earned and paid is the Banks Interest

- Supports the standard of deferred payments function of money

Commercial Bank

- Financial institution which accepts deposits from individual rms, government and
lends for deferred payments

- Accepts deposits from individuals, rms and government. Time deposits ( xed
deposits: not withdraw able on demand) and demand deposits (withdraw able on
demand)

- Issue cheques, demand drafts

- Make Advances (loans): Short term loans or long term loans like house loans, car loans,
student loans

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- Credit creation: They provide additional purchasing power to borrowers from the
deposits accepted

Central Bank

*monetary: regulating the amount of money in an economy

Consicuos income

Discretionary income

Disposable income

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