Demand & Supply: Laws, Elasticity & Applications

1. Law of Demand

Definition: As price increases, quantity demanded decreases (ceteris paribus).

Exceptions to Law of Demand:

• Giffen goods (e.g., staple food during famine)
• Veblen goods (luxury items like diamonds)
• Speculative goods (e.g., stocks during boom)

2. Law of Supply

Definition: As price increases, quantity supplied increases (ceteris paribus).

3. Elasticity Concepts

Type	Formula	Example
Price Elasticity of Demand (PED)	%ΔQd / %ΔP	PED > 1 (Elastic), PED < 1 (Inelastic)
Income Elasticity (YED)	%ΔQd / %ΔY	YED > 0 (Normal goods), YED < 0 (Inferior goods)
Cross Elasticity (XED)	%ΔQd of A / %ΔP of B	XED > 0 (Substitutes), XED < 0 (Complements)

Factors Affecting Elasticity:

• Availability of substitutes (more substitutes → more elastic)
• Necessity vs luxury (necessities are inelastic)
• Time period (long-run demand is more elastic)

4. Applications (Prelims Focus)

A. Government Policies

• Minimum Support Price (MSP): Price floor → surplus supply.
• Taxation: Higher taxes on inelastic goods (e.g., cigarettes) generate more revenue.

B. Market Scenarios

• Agriculture: Low PED → price fluctuations (need for buffer stocks).
• Oil prices: Inelastic demand → geopolitical shocks impact economies severely.

5. Recent Examples (UPSC Relevance)

• Electric Vehicles (EVs): Govt subsidies ↑ demand (YED concept).
• Onion prices: Export bans to control supply (inelastic demand).

Key Terms to Remember

• Consumer Surplus: Difference between willingness to pay and actual price.
• Producer Surplus: Difference between market price and minimum acceptable price.
• Equilibrium: Where demand = supply (no surplus/shortage).

Conclusion

Demand-supply dynamics form the core of microeconomics. Focus on elasticity types, exceptions to laws, and real-world applications for UPSC Prelims.