ECONOMIC
                            &
                       BUSINESS
                   ENVIRONMENT
                                     Chapter
                                     1 Basics of Demand and
                                        Supply and Forms of
                                        Market Competition          1
                                     2 National Income
                                        Accounting and Related
                                        Concepts                   22
                                     3 Indian Union Budget         39
                                     4 Indian Financial Markets    51
                                     5 Indian Economy              88
                                     6 Entrepreneurship Scenario  108
                                     7 Business Environment       120
                                     8 Key Government
                                        Institutions              136
                Lesson 1
                           BASICS OF DEMAND
                                  AND
                                 SUPPLY
                               AND FORMS
                                   OF
                                MARKET
                              COMPETITION
                               1
              2                        Economic & Business Environment
              THEORY OF DEMAND AND SUPPLY
              Meaning of Demand
              Demand is an economic principle referring to a consumer's desire to purchase goods and services
              and willingness to pay a price for a specific good or service.
              Law of Demand
              According to the law of demand, other things being equal, if price of a commodity falls, the quantity
              demanded of it will rise, and if price of the commodity rises, its quantity demanded will decline. It
              implies that there is an inverse relationship between the price and quantity demanded of a commodity,.
              In other words, other things being equal, quantity demanded will be more at a lower price than at
              higher price.
              The law of demand describes the functional relationship between price and quantity demanded.
              Among various factors affecting demand, price of a commodity is the most critical factor. Thus,
              demand of a commodity is mainly determined by the price of commodity.
              Dx = f(Px).
              The law of demand may be understood from the following example:
                           PRICE PER CAN (INR)   QUANTITY DEMANDED
                               80                        0
                               70                      200
                               60                      400
                               50                      600
                               40                      800
                               30                     1000
                               20                     1200
                               10                     1400
                                0                     1600
                                                        Economic & Business Environment                                3
                                                           Source: Economics Online
                     Thus, it may be observed that with the rise in price per can, the demand for the cans is reducing.
                     Assumptions of the law of demand
                     The above stated law of demand is conditional. It is based on certain conditions as given. It is therefore,
                     always stated with the ‘other things being equal’. It relates to the change in price variable only,
                     assuming other determinants of demand to be constant. The law of demand is thus, based on the
                     following ceteris paribus assumptions:
                          1.  No Change in Consumer’s Income
                          2.  No Change in Consumer’s Preferences
                          3.  No Change in the Fashion
                          4.  No Change in the Price of Related Goods
                          5.  No Expectation of Future Price Changes or Shortages
                          6.  No Change in Size, Age Composition and Sex Ratio of the Population
                          7.  No Change in the Range of Goods Available to the Consumers
                          8.  No Change in the Distribution of Income and Wealth of the Community
                          9.  No Change in Government Policy
                        10.   No Change in Weather Conditions