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Economics 3% exam weight

Demand and Supply

Part of the TNPSC Group 1 study roadmap. Economics topic econom-002 of Economics.

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Demand and Supply

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

Demand is the quantity of a good consumers are willing and able to buy at various prices during a specific period, ceteris paribus. Supply is the quantity producers are willing and able to sell at various prices during a specific period, ceteris paribus.

The Law of Demand states an inverse relationship between price (P) and quantity demanded (Qd) — the demand curve slopes downward. The Law of Supply states a direct relationship between P and quantity supplied (Qs) — the supply curve slopes upward. Market equilibrium occurs at the price where Qd = Qs.

ConceptDirection of curveCause of change
Law of DemandDownward (inverse)Price change → movement along curve
Law of SupplyUpward (positive)Price change → movement along curve
Shift of curveLeft or rightNon-price determinant changes

Price elasticity of demand: Ep = (% ΔQd) / (% ΔP). Ep > 1 elastic, Ep < 1 inelastic, Ep = 1 unitary. A price ceiling below equilibrium creates shortage; a price floor above equilibrium creates surplus.

🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Demand Function and the Law of Demand

The demand function is written as Qd = f(P, Y, Pr, T, N, E), where P is the price of the good (₹/unit), Y is consumer income (₹), Pr is the price of related goods, T captures tastes and preferences, N is the number of buyers, and E is expectations about future price or income. Holding all other variables constant (ceteris paribus) and varying P traces out the demand curve, which slopes downward because of the income and substitution effects.

Supply Function and the Law of Supply

Symmetrically, Qs = f(P, Pf, T, Np, S, G), where Pf is the price of factors of production, T is technology, Np is the number of sellers, S is subsidies/taxes, and G reflects government policy. The supply curve slopes upward because higher prices cover rising marginal costs and attract new producers.

Shift vs Movement

A change in price causes a movement along the curve (change in quantity demanded or supplied). A change in any non-price determinant causes a shift of the entire curve (change in demand or supply).

Equilibrium and Disequilibrium

Setting Qd = Qs solves for the equilibrium price P* and quantity Q*. If the market price is below P*, excess demand (shortage) emerges and pushes price upward. If the market price is above P*, excess supply (surplus) emerges and pushes price downward.

Price Elasticity of Demand

Ep = (% ΔQd) / (% ΔP) = (ΔQ/Q) ÷ (ΔP/P).

Value of EpTypeTotal revenue when P rises
Ep > 1ElasticFalls
Ep = 1UnitaryUnchanged
Ep < 1InelasticRises

Cross-price elasticity Exy > 0 marks substitutes; Exy < 0 marks complements. Income elasticity Ey > 1 indicates a luxury, 0 < Ey < 1 a necessity, and Ey < 0 an inferior good.

TNPSC Exam Pattern

Demand and Supply carries roughly 3% weight in the TNPSC Group 1 Economics paper. Expect 1–2 Prelims MCQs on definitions, curve shifts, and elasticity classification, plus short-answer scope in Mains General Studies on price-control applications such as MSP, the public distribution system, and fuel pricing.

🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Edge Cases That Break the Standard Curves

The downward-sloping demand curve fails for Giffen goods (staple inferior goods whose demand rises when price rises, e.g., low-income rural consumption of coarse grains) and Veblen goods (luxury items whose demand rises with price because of status signalling). The upward-sloping supply curve can bend backward when wages rise so much that labour supplies less labour at very high wage rates. Always read the question stem before assuming direction.

Price Controls and Indian Policy Context

A price ceiling binds only when set below equilibrium. India uses this form of control on LPG cylinders, essential drugs, and rental housing in some states. A price floor binds only when set above equilibrium; the Minimum Support Price (MSP) for wheat, paddy and sugarcane is a textbook floor — it guarantees farmer income but produces government procurement surplus. The Public Distribution System (PDS) is a rationing response to a non-market ceiling, prioritising below-poverty-line households.

Worked Example — Arc Elasticity

Suppose the price of a commodity rises from ₹40 to ₹50 per unit, and quantity demanded falls from 100 units to 80 units.

Average price = (40 + 50)/2 = 45; average quantity = (100 + 80)/2 = 90.

% ΔQd = (100 − 80)/90 × 100 = 22.22%; % ΔP = (50 − 40)/45 × 100 = 22.22%.

Ep = 22.22 / 22.22 = 1.0 → unitary elastic, and a change in price leaves total revenue unchanged.

If instead quantity falls to 60 units, % ΔQd = (100 − 60)/80 × 100 = 50%; Ep = 50/22.22 ≈ 2.25 — elastic, so a price rise reduces total revenue.

Common Mistakes to Avoid

  • Writing “change in demand” when the question describes a price change (correct term: change in quantity demanded).
  • Computing elasticity using the initial base only; the percentage-change formula uses the average of the two values for arc elasticity.
  • Treating MSP, PDS and LPG subsidy as identical instruments — they combine price floors, rationing and direct transfers respectively.

Practice Prompts

  1. Distinguish, with a diagram, the effect of (a) a fall in consumer income on the demand curve and (b) a fall in the price of the good on quantity demanded. Why is the second not a shift?
  2. A commodity has Ep = 1.4 at the current price. The government imposes a 10% sales tax. Predict the direction of change in equilibrium quantity, total revenue of sellers, and consumer surplus, and justify each step.

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