Theory of Demand and Supply

Core concepts

1. 01Demand: quantity of a good consumers are willing & able to buy at given price.
2. 02Law of Demand: inverse relation between price and quantity demanded (ceteris paribus).
3. 03Determinants: price of substitutes, complements, income, taste, expectations.
4. 04Elasticity: responsiveness of demand to change in price/income.
5. 05Supply: quantity producers willing to sell; direct relation with price.

Exam-critical pointers

• ⭐Giffen and Veblen goods are exceptions to the Law of Demand.
• ⭐If Ed > 1 elastic, Ed = 1 unitary, Ed < 1 inelastic, Ed = 0 perfectly inelastic.
• ⭐Inferior goods have negative income elasticity.
• ⭐Cross elasticity: positive for substitutes, negative for complements.