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Market Normal goods Supply

Market forces Inferior goods Supply schedule

Demand Movement along the demand cure Law of supply

Derived demand Shift in demand curve Supply curve

Demand schedule Change in quantity demanded Movement along the supply curve
Demand curve Competitive Markets: Shift in supply curve
demand and supply
Key Terms
Law of demand Change in demand Determinants of supply
Law of diminishing marginal utility Extension in demand Change in quantity supplied

Determinants of demand Contraction in demand Change in supply


Supplementary or substitute goods Increase in demand Extension in supply
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Complementary goods Decrease in demand Contraction in supply
Increase in supply Market disequilibrium Implicit costs

Decrease in supply Excess demand or shortage Economic costs

Supply shocks Excess supply or surplus Accounting costs

Subsidy Change in market equilibrium Profit

Tax Consumer surplus Economic profit


Direct taxes Competitive Markets: Normal profit
demand and supply
Key Terms
Indirect taxes Producer surplus Abnormal profit or super-normal
profit
Joint supply Market efficiency Loss

Market equilibrium Marginal benefit


Equilibrium price Marginal cost
Equilibrium quantity
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Market

Market is a place where buyers and sellers meet to exchange goods


and services.

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Market forces

Economic factors comprise of demand and supply which affects the


price and quantity of products available in the market in a given time
period.

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Demand

Demand refers to various quantities of product which consumers are


willing and able to buy at various possible prices in a given time
period.

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Derived demand

Demand of product which is a consequence of the demand of some


other product.

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Demand schedule

Demand schedule is a tabular presentation of the to various quantities


of product which consumers are willing and able to buy at various
possible prices in a given time period. If it represents the possible
demand by an individual consumer/a firm of a particular product it is
called as individual demand schedule, while when it represents the
total demand of that product by all the individuals/firms together, it is
called as market demand schedule.

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Demand curve

Demand curve is the graphical representation of various quantities of


product which consumers are willing and able to buy at various
possible prices in a given time period. Demand curve is downward
sloping.

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Law of demand

Law of demand explains the relationship between price and quantity demanded
of a product in a given time period, when everything else which may affect
demand remains constant. According to the law of demand there is an inverse
relationship between price and quantity demanded of a product, ceteris paribus,
which means when the price increases quantity demanded of a product
decreases and vice-versa.

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Law of diminishing marginal utility

Law of diminishing marginal utility explains the relationship between


consumption of additional unit of a product and the satisfaction
derived from the consumption of the same. According to the law of
diminishing marginal utility, the amount of satisfaction derived by
consumer keep decreasing with every additional unit of a product
consumed. It may reach to a point where an additional unit consumed
may not increase the amount satisfaction derived out of consumption
post that any further consumption may affect the satisfaction derived,
negatively.
Law of diminishing marginal utility is considered as an economic
reason behind downward sloping demand curve.

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Determinants of demand

All non-price factors affecting demand are called determinants of


demand. For example: income, season, population, taste, preference,
habit etc.

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Supplementary or substitute goods

Products which can be used in place of each other are called


supplementary goods. For example: tea and coffee, petrol run cars and
diesel run cars etc.

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Complementary goods

Products which are used together are called complementary goods.


For example: car and petrol, transport service and hotel
accommodation etc.

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Normal goods

All those goods whose demand increases with increase in income are
called normal goods. For example: demand for foreign holidays, new
car etc.

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Inferior goods

All those goods whose demand increase with decrease in income and
vice-versa. For example: second hand clothes, second hand books,
customer if switch back to white bread from brown bread due to fall in
income, then white bread here is an example of inferior good.

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Movement along the demand curve

When quantity demanded of a product increases or decreases due to


change in the price of product, it causes movement along the demand
curve. Movement along the demand curve can cause extension or
contraction in demand.

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Shift in demand curve

When the demand of a product increases or decreases due to change


in any of the non-price factor/determinant of demand, it causes shift
in demand curve. Shift in demand curve can be rightward or leftward.

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Change in quantity demanded

Change in quantity demanded of product refers to increase or


decrease in quantity demanded of product caused by decrease or
increase in price of product respectively.

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Change in demand

Change in demand of product refers to increase or decrease in demand


of product caused by change in any of the non-price
factor/determinant of demand of product.

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Extension in demand

Extension in demand refers to increase in quantity demanded of a


product due to fall in price of a product.

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Contraction in demand

Contraction in demand refers to decrease in quantity demanded of a


product due to rise in price of a product.

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Increase in demand

Increase in demand occurs due to favourable change in any of the non-


price factor/determinant of demand of product.

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Decrease in demand

Decrease in demand occurs due to adverse/unfavourable change in


any of the non-price factor/determinant of demand of product.

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Supply

Supply refers to various quantities of product which producers are


willing and able to provide at various possible prices in a given time
period.

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Supply schedule

Supply schedule is a tabular presentation of the to various quantities


of product which producers are willing and able to provide at various
possible prices in a given time period. If it represents the possible
supply by an individual/a firm of a particular product it is called as
individual supply schedule, while when it represents the total supply
of that product by all the individuals/firms together, it is called as
market supply schedule.

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Law of supply

Law of supply explains the relationship between price and quantity


supplied of a product in a given time period, when everything else
which may affect supply remains constant. According to the law of
supply there is a direct relationship between price and quantity
demanded of a product, ceteris paribus, which means when the price
increases quantity supplied of a product increases and vice-versa.

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Supply curve

Supply curve is the graphical representation of various quantities of


product which producers are willing and able to provide at various
possible prices in a given time period. Supply curve id upward sloping.

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Movement along the supply curve

When quantity supplied of a product increases or decreases due to


change in the price of product, it causes movement along the supply
curve. Movement along the supply curve can cause extension or
contraction in supply.

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Shift in supply curve

When the supply of a product increases or decreases due to change in


any of the non-price factor/determinant of demand, it causes shift in
supply curve. Shift in supply curve can be upward or downward.

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Determinants of supply

All non-price factors affecting supply are called determinants of


supply. For example: taxes or subsidies, number of firms, technology,
joint supply, role of expectation, supply shocks etc

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Change in quantity supplied

Change in quantity supplied of product refers to increase or decrease


in quantity supplied of product caused by increase or decrease in price
of product, respectively.

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Change in supply

Change in supply of product refers to increase or decrease in supply of


product caused by change in any of the non-price factor/determinant
of supply of product.

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Extension in supply

Extension in supply refers to increase in quantity supplied of a product


due to rise in price of a product.

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Contraction in supply

Contraction in supply refers to decrease in quantity supplied of a


product due to fall in price of a product.

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Increase in supply

Increase in supply occurs due to favourable change in any of the non-


price factor/determinant of supply of product.

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Decrease in supply

Decrease in supply occurs due to adverse/unfavourable change in any


of the non-price factor/determinant of supply of product.

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Supply shocks

Sudden unpredictable changes which may affect the supply of a


product adversely or favourably are called supply shocks. For example:
change in weather condition which may affect agriculture output,
outbreak of epidemic, war, natural or artificial calamities etc

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Subsidy

Subsidy is a grant given by the government to producers to decrease


their cost of production, which can have an implication of reducing the
market price of a product.

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Tax

Tax are the source of government revenue. There are two types of
taxes: direct tax and indirect tax.

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Direct taxes

Direct tax is tax on income and wealth of the tax payer. For example:
income tax, tax on interest income, tax on profit (corporate tax),
wealth tax, inheritance tax etc.

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Indirect taxes

Indirect tax is a tax on spending. For example Goods and services tax
(GST), Excise duty, tariff or custom duty etc.

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Joint supply

Product which cannot be produced independently from one another,


are considered as produced in joint supply. In other words, while
producing a particular product when essentially another one or more
products are produced, it is referred as joint supply. For example, the
refinery process for crude oil yields petroleum as well as paraffin,
lubricants and the chemical bases plastics. A rise in the supply of crude
oil results in a commensurate rise in the supply of petroleum, paraffin,
lubricants, etc.

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Market equilibrium

Market equilibrium refers to a situation where quantity demanded of


a product equals quantity supplied of a product. When market is in
equilibrium there is neither excess demand nor excess supply in the
market for that product.

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Equilibrium price

The price at which quantity demanded of a product equals quantity


supplied is called equilibrium price, at this price neither surplus nor
shortage exists hence it can also be referred a market clearing price.

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Equilibrium quantity

When quantity demanded is equal to quantity supplied it is referred as


equilibrium quantity.

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Market disequilibrium

When either excess demand exists or excess supply exists, market is


said to be in disequilibrium.

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Excess demand or shortage

When quantity demanded of a product exceeds its quantity supplied,


it is called as excess demand or shortage.

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Excess supply or surplus

When quantity supplied of a product exceeds its quantity demanded,


it is called as excess supply or surplus.

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Change in market equilibrium

When either any of the determinant of demand or any of the


determinant of supply affect demand or supply of a product
respectively, market equilibrium position tends to change.

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Consumer surplus

Consumer surplus is the difference between the maximum price which


consumer is willing and able to pay and the market price. It is the area
between the market demand curve and its equilibrium.

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Producer surplus

Producer surplus is the difference between the minimum price which


producer is willing and able to accept and the market price. It is the
area between the market supply curve and its equilibrium.

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Market efficiency

Market is said to efficient when it achieves both productive and


allocative efficiency. In other words, when marginal benefit is equal to
marginal cost, market achieves efficiency. When market is efficiently
allocating its resources, the sum of producer and consumer surplus is
maximum.

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Marginal benefit

Marginal benefit refers to the additional benefit derived from the


additional unit consumed.

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Marginal cost

Marginal cost refers to the additional incurred in production one more


unit of a product.

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Explicit costs

Explicit cost refers to the cost paid to the households from outside the
business against using the resources owned by them.

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Implicit costs

Implicit cost refers to the opportunity of using the resources owned by


the firm in production activities.

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Economic costs

Economic cost is the sum total of explicit cost and implicit cost.

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Accounting costs

Accounting cost is equal to explicit cost.

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Profit

Profit refers to the positive difference between total revenue and total
cost.

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Economic profit

Economic profit is the positive difference between total revenue and


economic costs.

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Normal profit

When firm’s economic profit is equal to zero, it said to be making


normal profit.

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Abnormal profit or super-normal profit

When firm’s economic profit is greater than zero, it said to be making


abnormal profit.

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Loss

Loss refers to a negative difference between total revenue and total


cost.

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