🟠 Topic 2: Demand and Supply – Market Equilibrium

📖 Introduction (1000+ Words)

Demand and supply form the foundation of market economics. They determine prices, production levels, and consumer choices, shaping economic activity at both the micro and macro levels. Understanding these concepts is crucial for UPSC, RBI Grade B, and other competitive exams.

🔹 What is Demand?

💡 Definition: Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a given period.

🛒 Factors Affecting Demand

1️⃣ Price of the Good – Law of Demand: As price decreases, demand increases, and vice versa 📉.
2️⃣ Income Levels – Higher incomes lead to higher demand for normal goods but lower demand for inferior goods 🏠.
3️⃣ Price of Related Goods –

• Substitutes 🥤➡️🍹: If Pepsi price rises, demand for Coke increases.
• Complements 🍔🍟: If burger price falls, demand for fries rises.
  4️⃣ Consumer Preferences – Trends, advertising, and cultural factors affect demand 📺.
  5️⃣ Future Expectations – If people expect prices to rise, they buy more today 🛒.
  6️⃣ Government Policies – Taxes, subsidies, and regulations affect demand 💰.

📉 Law of Demand

✔️ When price increases, quantity demanded decreases (inverse relationship).
✔️ Demand curve slopes downward from left to right 📊.

🔹 What is Supply?

📦 Definition: Supply refers to the quantity of a good or service that producers are willing and able to offer at various prices during a given period.

⚙️ Factors Affecting Supply

1️⃣ Price of the Good – Higher prices encourage producers to supply more 📈.
2️⃣ Production Costs – Higher costs (wages, raw materials) reduce supply 🏭.
3️⃣ Technology – Better technology increases efficiency and supply ⚡.
4️⃣ Number of Sellers – More sellers increase supply 👨‍🌾.
5️⃣ Government Policies –

• Taxes 🚫 decrease supply.
• Subsidies ✅ increase supply.
  6️⃣ Natural Factors – Weather, disasters, and climate change impact supply 🌪️.

📈 Law of Supply

✔️ When price increases, quantity supplied increases (direct relationship).
✔️ Supply curve slopes upward from left to right 📊.

⚖️ Market Equilibrium

📊 Definition: Market equilibrium occurs when demand and supply balance each other at a certain price and quantity. This results in the equilibrium price (P)* and *equilibrium quantity (Q)**.

✅ If demand > supply, there’s a shortage, pushing prices up.
✅ If supply > demand, there’s a surplus, pushing prices down.
✅ Market equilibrium ensures no wastage of resources and efficient allocation.

📌 Graphical Representation of Equilibrium

• The demand curve slopes downward.
• The supply curve slopes upward.
• Intersection = Equilibrium Point (P*, Q*).

📌 Shifts in Demand and Supply

🔺 Increase in Demand → Price and Quantity rise 📈.
🔻 Decrease in Demand → Price and Quantity fall 📉.
🔺 Increase in Supply → Price falls, Quantity rises 📊.
🔻 Decrease in Supply → Price rises, Quantity falls 🏭.

🔥 Real-Life Examples

📢 1. Oil Prices (Global Impact)

• When OPEC cuts oil production, supply falls, and oil prices rise 🛢️.
• If new oil reserves are found, supply rises, and prices fall.

📢 2. Housing Market in India

• If home loans become cheaper, demand for housing rises, pushing prices up 🏡.
• If construction materials become expensive, supply falls, making homes costlier.

📢 3. COVID-19 and Face Masks

• Demand surge led to shortages, increasing prices 😷.
• As production ramped up, supply increased, stabilizing prices.

🔔 MCQs (2 and 4 Statements-Based with Spoiler Code)

1️⃣ Consider the following statements about demand:

1. The law of demand states that when price decreases, demand increases.
2. The demand curve generally slopes upward due to higher willingness to pay at higher prices.
3. A substitute good is one that is used alongside another good.
4. Government-imposed taxes can reduce demand for certain goods.

Which of the above statements are correct?

✅ Options:
(a) 1 and 4 only
(b) 2 and 3 only
(c) 1, 3, and 4 only
(d) 1, 2, 3, and 4

2️⃣ Which of the following factors affect supply?

1. Cost of production
2. Number of producers
3. Price of the good itself
4. Consumer preferences

✅ Options:
(a) 1, 2, and 3 only
(b) 2 and 4 only
(c) 1 and 3 only
(d) 1, 2, 3, and 4

3️⃣ When does a market reach equilibrium?

✅ Options:
(a) When demand equals supply
(b) When supply exceeds demand
(c) When price fluctuations are constant
(d) When production stops

4️⃣ Which of the following statements about equilibrium price are correct?

1. If demand increases, equilibrium price decreases.
2. If supply decreases, equilibrium price rises.
3. Equilibrium price is also known as the free-market price.
4. Government intervention is necessary to maintain equilibrium.

✅ Options:
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1, 2, and 4 only
(d) 2, 3, and 4 only

5️⃣ Which scenario represents a shortage in the market?

✅ Options:
(a) Demand > Supply
(b) Supply > Demand
(c) Supply and Demand are equal
(d) Market failure