📉 Demand & Supply
Laws of demand and supply, elasticity, equilibrium.
📉📈 The Engine of Markets
Law of Demand — All else equal, as price of a good rises, quantity demanded falls (inverse relationship). Demand curve slopes downward.
Exceptions to Law of Demand (when demand rises as price rises):
• Giffen goods — inferior goods that form large part of poor people's diet (e.g., coarse grains)
• Veblen/Prestige goods — luxury goods (diamond, luxury cars) — higher price = more status
• Speculation — if people expect prices to rise further, they buy more now
Law of Supply — All else equal, as price rises, quantity supplied rises (direct relationship). Supply curve slopes upward.
Equilibrium — where demand = supply. At this point, market clears — no surplus or shortage. Price at equilibrium = market price.
Elasticity of Demand — how much quantity demanded changes when price changes.
• Elastic (Ed > 1): luxury goods, easily substitutable goods
• Inelastic (Ed < 1): necessities (salt, medicine, petrol)
• Unitary elastic (Ed = 1): rare
Movement along demand curve = caused by change in PRICE of the same good.
Shift of demand curve = caused by change in factors OTHER than price:
• Income (more income → demand rises for normal goods)
• Prices of related goods (substitutes vs complements)
• Tastes and preferences
• Expectations about future prices
• Number of buyers
Exam tip: "Increase in demand" = rightward shift. "Decrease in demand" = leftward shift.
• Normal goods — demand rises as income rises (most goods: cars, clothes, electronics)
• Inferior goods — demand falls as income rises (coarse grains, second-hand goods)
• Substitute goods — can replace each other (tea and coffee, Pepsi and Coke)
• Complementary goods — used together (car and petrol, printer and ink)
• Giffen goods — a special inferior good where demand rises as price rises
• Veblen goods — luxury goods where demand rises as price rises (status symbol)
Demand and Supply — Interactive Graph
AnimationShift curves to see how price and quantity change. Right shift of D = more demand (income rise). Right shift of S = more supply (technology improves).
Elasticity Explorer
Interactive1. No close substitutes — you cannot easily replace petrol for running a car (CNG/EV are long-term alternatives but not immediate)
2. Necessity — people need to commute to work, transport goods — cannot simply stop
3. Small share of budget — for many users, petrol is a small % of monthly expense
4. Complementary to car — people already own cars and have no choice but to buy petrol
In the short run: demand is very inelastic.
In the long run: demand becomes more elastic as people switch to EVs, carpool, use public transport.
This is why governments can tax petrol heavily — revenue is predictable because demand does not fall much. India collected over ₹4 lakh crore in petroleum taxes in FY2022-23.
• Named after Sir Robert Giffen (observed in 1800s Ireland during potato famine)
• Inferior goods that form a large proportion of poor people's budget
• When price rises, real income of poor people falls — they cut luxury items and buy MORE of the now-costlier Giffen good
• Violates law of demand: demand RISES when price RISES
• Example: Coarse grains like jowar, bajra for very poor households
• Key condition: must be inferior good + large budget share + no good substitute
Veblen Goods (Prestige/Conspicuous goods):
• Named after Thorstein Veblen
• Luxury goods bought to display wealth/status
• When price rises, demand rises — because higher price = higher status
• NOT inferior goods (unlike Giffen) — these are superior goods
• Example: Designer handbags, luxury cars (Lamborghini), rare wines, diamonds
Key difference: Giffen goods are bought by the poor out of necessity. Veblen goods are bought by the rich for status.