Basic Economic Concepts
1. Supply and Demand
**Supply** refers to the quantity of a good or service that producers are willing to sell at various prices.**Demand** is the quantity of a good or service that consumers are willing to purchase at various prices.The **Law of Demand** states that, all else being equal, as the price of a good increases, the quantity demanded decreases and vice versa.The **Law of Supply** states that as the price of a good increases, the quantity supplied increases and vice versa.### Equilibrium
Market equilibrium occurs where the supply and demand curves intersect, determining the market price and quantity.### Factors Affecting Supply and Demand
**Non-price factors** affecting demand: consumer income, preferences, price of related goods.**Non-price factors** affecting supply: production costs, technology, number of suppliers.---
2. Elasticity
**Price Elasticity of Demand** measures how much the quantity demanded changes in response to a change in price.**Formula**: Elasticity = % Change in Quantity Demanded / % Change in Price**Types**: Elastic (>1), Inelastic (<1), Unit Elastic (=1)### Importance of Elasticity
Helps businesses set prices and forecast revenue.Important for tax policy decisions.---
3. Opportunity Cost
Defined as the cost of the next best alternative forgone when making a decision.Critical in decision-making processes in economics.### Example
If a student chooses to study for an exam instead of working a part-time job, the income from the job is the opportunity cost of studying.---
4. Market Structures
**Perfect Competition**: Many firms, identical products, free entry and exit.**Monopoly**: Single firm controls the market, unique product, high barriers to entry.**Oligopoly**: Few firms dominate, can be similar or differentiated products.### Comparison Table
| Market Structure | Number of Firms | Product Type | Barriers to Entry |
|---------------------|------------------|---------------------|-------------------|
| Perfect Competition | Many | Identical | Low |
| Monopoly | One | Unique | High |
| Oligopoly | Few | Similar/Differentiated| Moderate |
---
5. Monetary Policy
Conducted by a country’s central bank (e.g., Reserve Bank of India).**Tools**: Open market operations, interest rates, reserve requirements.### Objectives
Control inflation, manage employment levels, stabilize currency.---
6. Fiscal Policy
Refers to government spending and taxation decisions.Aims to influence economic conditions, particularly aggregate demand.### Components
**Expansionary Fiscal Policy**: Increases in government spending and tax cuts.**Contractionary Fiscal Policy**: Decreases in government spending and tax increases.---
7. Inflation
The rate at which the general level of prices for goods and services rises, eroding purchasing power.Measured by indices such as the Consumer Price Index (CPI) and Producer Price Index (PPI).### Types of Inflation
**Demand-pull inflation**: Caused by increased demand.**Cost-push inflation**: Caused by rising costs of production.---
8. Gross Domestic Product (GDP)
The total value of all goods and services produced within a country over a specific time period.**Real GDP** adjusts for inflation, while **Nominal GDP** does not.### Importance of GDP
Indicator of economic health and growth.Used by policymakers to gauge economic performance.---
### UPSC Exam Tips
Focus on definitions and key terms.Understand the implications of each concept on real-world economics.Keep abreast of current economic policies in India and their outcomes.---