What is 'Economics

Economics is a social science that focuses on the production,

distribution, and consumption of goods and services, and
analyzes the choices that individuals, businesses, governments,
and nations make to allocate resources.

What is economics all about

Economics is the study of how things are made, moved around,

and used. It looks at how people, businesses, governments, and
countries choose to use their resources. Economics is the study
of how people act, based on the idea that people act rationally
and try to get the most value or bene t. Economics is the study of
how work and business are run. Since there are many ways to
use human labour and many ways to get resources, it is the job of
economics to gure out which ways produce the best results

De nition of Economic

Wealth De nition – Adam Smith

The wealth de nition was given by Adam Smith. According to this

de nition, economics is termed as the “science of wealth”, that is,
the economy of a nation depends on the wealth generated
through the goods and services. This includes the exports and
imports of the goods and services, which is indicated by
consumption and production

De nition of Economics – Alfred Marshall

According to Alfred Marshall, economics is de ned as the “means

to ends”. Here, the means are the goods and services that are
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 available. The ends refer to the needs and requirements by

people that are satis ed through the means. This de nition
considered economics as a study of societal needs and means

Scarcity De nition – Lionel Robbins

According to this de nition of economics, the appropriate

allocation of scarce resources is the main objective of economics.
This de nition studies the relation between human behaviour and
use of resources that are scarce to meet the requirements

Final and Compromise De nition – Paul Samuelson

This de nition of economics is considered to be a complete

amalgamation of the previous de nitions. It states that wealth is
used for employing scarce resources that can have substitute
uses. The goods and services made out of the scarce resources
are distributed to the society for usage

In general, economics can be broken into two parts:

macroeconomics, which looks at how the economy works, and
microeconomics, which looks at how people and businesses
work

Varieties of Economic
There are two main ways to learn about economics

A person, a family, a business, a group, or the government can all

make decisions independently. Microeconomics looks at
different parts of human behaviour to gure out how people
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 react to changes in prices and why they want certain things

at certain prices.

Microeconomics tries to explain why and how different things

have different values, how people make nancial decisions,
and how they can trade, work together, and cooperate in the best
way. Microeconomics looks at how supply and demand change
over time and how well things are made, and how much they cost.
It also looks at how people divide and share work, set up and run
businesses, and deal with uncertainty, risk, and strategic game
theory

Macroeconomics looks at the economy as a whole, both

nationally and globally. It does this by simulating the economy
with a lot of data and variables from the economy. It could be a
certain part of the world, a country, a continent, or the whole
world. It mostly looks at how economies grow, change, and
go through cycles. Foreign trade, government scal and
monetary policy, unemployment rates, in ation and interest rates,
the growth of total production output as shown by changes in
Gross Domestic Product (GDP), and business cycles that cause
expansions, booms, and recessions are all looked at.

There is a connection between microeconomics and

macroeconomics. The sum of all microeconomic events makes up
an aggregate macroeconomic event. But these two areas of
economics use very different theories, models, and research
methods that can make them seem to go against each other.
Many economists study how to put together the basics of
microeconomics with macroeconomics into theory and research

Economic Indicators
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 Economic indicators show how a country's economy is doing in a

speci c area. When government agencies or private groups put
out these reports regularly, they usually have a big effect on the
stock, xed income, and foreign exchange markets. They can
also help investors gure out how the economy will affect markets
and make decisions about investments

Gross national product (GDP)

Many people think that a country's gross domestic product (GDP)

is the best way to measure how well its economy is doing. It is
the total market value of all nished goods and services
made in a country during a certain year or other time period.
The Bureau of Economic Analysis (BEA) releases a monthly
report at the end of each month. Many investors, analysts, and
traders pay attention to the advance GDP report and the
preliminary report, which come out a few months before the
annual GDP report

Retail sales

The Department of Commerce (DOC) puts out a report on retail

sales in the middle of each month. This report measures the total
amount of money made or the dollar value of all products sold in
stores

Using sample data from stores across the country, the report
gures out how many products were sold, which is a good
indicator of how much money people are spending

Industrial manufacturing
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 The Federal Reserve puts out a report every month called

"Industrial Production" that shows how the production of U.S.
factories, mines, and utilities has changed over time. One of the
closely watched variables in this study is the capacity utilisation
ratio, which shows how much of the economy's productive
capacity is being used instead of sitting idle. A country should see
its production values increase and its capacity is used to its
fullest

Employment Data

The Bureau of Labor Statistics (BLS) reports "nonfarm payrolls"

every rst Friday of the month with information about jobs
Most of the time, a strong economy means that jobs are being
added quickly. In the same way, big drops could mean that
contractions are coming. Even though these are broad trends, it is
important to look at how the economy is doing

Changes in prices for consumers (CPI

The Consumer Price Index (CPI), which the BLS also puts out, is
the standard way to measure in ation. It shows how much retail
prices (consumer costs) have changed. The CPI compares price
changes from month to month and from year to year by putting
goods and services from the economy into a basket.

Relation between science, engineering , technology and

economics
Science, engineering, technology, and economics are all
interconnected elds that have a signi cant impact on
society, the environment, and the global economy. These
elds in uence each other in various ways and are
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 essential for the development of new products, services, and

innovations.

Science is the study of the natural world, including physical

and biological phenomena. It involves
-systematic observation,
-experimentation, and
-analysis of data to develop theories and models that explain
how the universe works.

Scienti c discoveries have had a profound impact on human

civilization, from the invention of the wheel to the development
of modern medicine

Engineering, on the other hand, is the application of scienti c

knowledge to
-design and build structures,
-machines,
-systems, and
-processes that solve problems and improve the quality of life.

Engineers use the principles of science to create practical

solutions to real-world problems

Technology is the application of scienti c knowledge to

-create tools,
-techniques, and
-machines that enable people to do things more ef ciently and
effectively. It includes everything from smartphones and
laptops to sophisticated medical equipment and space
shuttles
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 Economics is the study of how individuals, businesses,
and governments allocate resources to meet their needs and
wants. It is concerned with the production, distribution, and
consumption of goods and services and how they affect the
economy as a whole

The relationship between science, engineering, technology,

and economics is complex and multi-faceted. For example,
scienti c discoveries often lead to new engineering
designs and technological innovations that can
revolutionize entire industries. The development of the
internet, for example, was made possible by scienti c
breakthroughs in computer science and engineering

Engineering and technology, in turn, provide the tools and

techniques needed to apply scienti c knowledge to real-
world problems. The development of new medical
treatments, for example, requires the use of advanced
engineering and technology to create equipment that can
diagnose and treat diseases

Economics plays a crucial role in all of these elds, as it

provides the framework for understanding how these
innovations impact the economy as a whole. For example, the
introduction of new technology can disrupt entire industries,
creating new opportunities for businesses to innovate and
grow. However, it can also lead to job losses and economic
dislocation for those who are unable to adapt

The relationship between these elds is also in uenced

by policy decisions made by governments and other
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 organizations. For example, governments may provide
funding for scienti c research to develop new technologies, or
they may create regulations that require businesses to invest
in cleaner technologies to reduce their environmental impact

In conclusion, the relationship between science, engineering,

technology, and economics is complex and multifaceted.
These elds are all essential for the development of new
products, services, and innovations that improve our lives and
drive economic growth. They in uence each other in various
ways and are essential for creating a sustainable future for
ourselves and future generations. Understanding this
relationship is crucial for policymakers, businesses, and
individuals who want to make informed decisions about how
to invest in the future.

Types of Economie

Economic System De nitio

Economic systems are the means that are adopted by

governments of respective countries for the distribution of
resources along with services and goods. Such an
arrangement is dependent on production factors– Land,
Labour, Capital and Entrepreneurs, and information
resources

Types of Economy
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 There are four types of economic systems

Traditional Economic System

This economic system retains essential characteristics in

which there is a very little specialisation or division of labour

A traditional economic system is most likely to be found in

rural settings, or in such developing nations where farming is
predominant. Such settings usually have very few resources
to share

Command Economic System/ Socialist economy

Command or Socialist economic system has a dominant

centralised authority in the form of government. The economy
is such a country that is controlled by the government. It is the
sole decision-making authority for determining production and
allocation

Ideally, the command system takes into consideration the best

interest of its populace

Market Economic System/ Capitalist economy/ free-

market economic system

A market economic system or capitalist economy involves

very less government interference and incorporates the
principles of the free market. There is a scant exercise of
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 control over resources. Market forces regulate demand and

supply

However, there does exist some degree of government

intervention in the form of regulations against monopoly, and
in favour of fair trade

Mixed Economic System

A mixed economic system combines the features of both

socialist and free-market economic systems. It is also known
as a dual system. Most of the countries today have a mixed
economic system with the existence of both public services as
well as private industries
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 Difference between Types of Economy

The difference between the types of economies are as

follows

Parameters Market Capitalis Command Socialis Mixed

Economic Economic Economi
System System System

Determination of price Demand and Supply in The central authority, Price is in uenced by
a market determine the most likely the govern, market forces of
price decides the prices of demand and supply as
goods and services well as government
regulations, in certain
instances.

Property Ownership Ownership vests with There is public Property is owned by

private entities ownership of property both public and private
entities.

Production Production is The underlying Production in a mixed

undertaken only with a objectives of production economy includes both
pro t motive is social welfare. pro t motive and social
welfare.

Competition There exists competition There is no competition Only entities in the

among entities present in a market owing to private sector
in such market. State ownership of experience competeition
rms.

Government Government has very The government retains Government has a full
Intervention little role to play in a full control over rms holding in the public
market economic sector but a limited role
system in its private
counterpart.

Distribution of income Very unequa Quite equa Considerable

inequalities exist
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Economic Sectors

These can be categorised into the following

1. Primary Sector

The primary sector in an economy has a direct interface with

the environment for purposes of production. Instances of the
primary sector are agriculture, farming, mining, and shing,
among others

The importance of the primary sector relates to the harvesting

of products or extraction from the environment for procuring
basic food and raw material. The end purpose of the primary
sector is to utilise natural resources optimally

2. Secondary Sector
In the secondary sector of an economy, raw materials are
converted into products that are t for both consumption or
sale and help to move away from a primitive economic
system. For example, the secondary sector helps a country to
move from agriculture or other similar activities towards a
developing market

In India, the secondary sector holds about 20% of the gross

domestic product. It helps to provide greater job opportunities
to the populace at large

3. Tertiary Sector

The Tertiary sector primarily covers the service sector, and

therefore, focuses on service exchanges and production.
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Examples of the tertiary sector are – insurance, banking,
communication and transportation, among others

The tertiary sector's signi cance is on the rise due to rapid

technological developments in various basic essential
services. These basic services include healthcare, police,
banking, etc

The most signi cant bene t of the tertiary sector is that it has
a lower barrier of entry for businesses

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 The Nature of the Economic Proble

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Resources: are the inputs required for the production of goods

and services

Scarcity: a lack of something (in this context, resources)

The fundamental economic problem is that there is a scarcity of
resources to satisfy all human wants and needs. There are nite
resources and unlimited wants. This is applicable to consumers,
producers, workers and the government, in how they manage
their resources

Economic goods are those which are scarce in supply and so

can only be produced with an economic cost and/or consumed
with a price. In other words, an economic good is a good with an
opportunity cost. All the goods we buy are economic goods, from
bottled water to clothes.

Free goods, on the other hand, are those which are abundant in
supply, usually referring to natural sources such as air and
sunlight

The Factors of Productio

Resources are also called ‘factors of production’ (especially in

Business). They are

Land: all natural resources in an economy. This includes the

surface of the earth, lakes, rivers, forests, mineral deposits,
climate etc
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 • The reward for land is the rent it receives
• Since, the amount of land in existence stays the same, its
supply is said to be xed. But in relation to a country or
business, when it takes over or expands to a new area, you can
say that the supply of land has increased, but the supply is not
depended on its price, i.e. rent.

• The quality of land depends upon the soil type, fertility, weather
and so on.

• Since land can’t be moved around, it is geographically

immobile but since it can be used for a variety of economic
activities it is occupationally mobile

Labour: all the human resources available in an economy. That

is, the mental and physical efforts and skills of workers/labourers

• The reward for work is wages/salaries.

• The supply of labour depends upon the number of workers

available (which is in turn in uenced by population size, no. of
years of schooling, retirement age, age structure of the
population, attitude towards women working etc.) and the
number of hours they work (which is in uenced by number of
hours to work in a single day/week, number of holidays, length
of sick leaves, maternity/paternity leaves, whether the job is
part-time or full-time etc.).

• The quality of labour will depend upon the skills, education

and quali cation of labour.

• Labour mobility can depend up on various factors. Labour can

achieve high occupational mobility (ability to change jobs) if they
have the right skills and quali cations. It can achieve
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 geographical mobility (ability to move to a place for a job)

depending on transport facilities and costs, housing facilities
and costs, family and personal priorities, regional or national
laws and regulations on travel and work etc

Capital: all the man-made resources available in an economy. All

man-made goods (which help to produce other goods – capital
goods) from a simple spade to a complex car assembly plant are
included in this. Capital is usually denoted in monetary terms as
the total value of all the capital goods needed in production

• The reward for capital is the interest it receives.

• The supply of capital depends upon the demand for goods

and services, how well businesses are doing, and savings in
the economy (since capital for investment is nanced by loans
from banks which are sourced from savings).

• The quality of capital depends on how many good quality

products can be produced using the given capital. For example,
the capital is said to be of much more quality in a car
manufacturing plant that uses mechanisation and technology to
produce cars rather than one in which manual labour does the
work.

• Capital mobility can depend upon the nature and use of the
capital. For example, an of ce building is geographically
immobile but occupationally mobile. On the other hand, a pen is
geographically and occupationally mobile

Enterprise: the ability to take risks and run a business venture or

a rm is called enterprise. A person who has enterprise is called
an entrepreneur. In short, they are the people who start a
business. Entrepreneurs organize all the other factors of
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 production and take the risks and decisions necessary to make a

rm run successfully

• The reward to enterprise is the pro t generated from the

business.

• The supply of enterprise is dependent on entrepreneurial

skills (risk-taking, innovation, effective communication etc.),
education, corporate taxes (if taxes on pro ts are too high,
nobody will want to start a business), regulations in doing
business and so on.

• The quality of enterprise will depend on how well it is able to

satisfy and expand demand in the economy in cost-effective
and innovative ways.

• Enterprise is usually highly mobile, both geographically and

occupationally

All the above factors of productions are scarce because the

time people have to spend working, the different skills they have,
the land on which rms operate, the natural resources they use
etc. are all in limited in supply; which brings us to the topic of
opportunity cost

Opportunity Cos

The scarcity of resources means that there are not suf cient
goods and services to satisfy all our needs and wants; we are
forced to choose some over the others. Choice is necessary
because these resources have alternative uses- they can be used
to produce many things. But since there are only a nite number
of resources, we have to choose
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 When we choose something over the other, the choice that was
given up is called the opportunity cost. Opportunity cost, by
de nition, is the next best alternative that is sacri ced/
forgone in order to satisfy the other

Example 1: the government has a certain amount of money and it

has two options: to build a school or a hospital, with that money.
The govt. decides to build the hospital. The school, then,
becomes the opportunity cost as it was given up. In a wider
perspective, the opportunity cost is the education the children
could have received, as it is the actual cost to the economy of
giving up the school

Example 2: you have to decide whether to stay up and study or

go to bed and not study. If you chose to go to bed, the knowledge
and preparation you could have gained by choosing to stay up
and study is the opportunity cost

The Economic Problem

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#:~:text=The%20economic%20problem%20is%20the,about%20how%20to%20allocate%20them.

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Three problems of economic organizatio

Every society must have to determine what goods are produced,

how these goods are made, and for whom these goods are
produced.

These three fundamental questions of economic organization-

what, how and for whom are as crucial today as they were at
the dawn of human civilization. Now we know details about them.
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What goods are produced and in what quantities? A society
must determine how much of each of the many possible goods
and services it will make, and when they will be produced.

• Will we produce paddy or jute in our eld?

• A few high-breed paddy or much more local paddy will be
produced?
• will we use scarce resources to produce manu consumption
goods?
• will we produce fewer consumption goods and more investment
goods.

Every society has to face this type of questions or problem. W

may call this problem as problem of choice

How are goods produced? A society must determine

• who will do the production,

• with what resources, and
• what production techniques they will use.
• Is electricity generated from natural gas, coal, or solar power?

This problem is called to be technological problem

For who are goods produced? One key task for a society is to
decide who gets to eat the fruit of the economic efforts. Or, how is
the national product divided among different households?

• Are many people poor or rich?

• Do high incomes go to teacher, doctor, businessman or
landlords?

This type of problem is called to be problem of distribution.

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 Utility in Economics: Types and Measurement

What Is Utility

In economics, utility is a term used to determine the worth or

value of a good or service. More speci cally, utility is the total
satisfaction or bene t derived from consuming a good or service.
Economic theories based on rational choice usually assume that
consumers will strive to maximize their utility

The economic utility of a good or service is important to

understand because it directly in uences the demand, and
therefore price, of that good or service. In practice, a consumer's
utility is usually impossible to measure or quantify. However,
some economists believe that they can indirectly estimate what is
the utility of an economic good or service by employing various
models

Understanding Utilit

The utility de nition in economics is derived from the concept of

usefulness. An economic good yields utility to the extent to which
it's useful for satisfying a consumer’s want or need. Various
schools of thought differ as to how to model economic utility and
measure the usefulness of a good or service

Utility in economics was rst coined by the noted 18th-century

Swiss mathematician Daniel Bernoulli. Since then, economic
theory has progressed, leading to various types of economic
utility
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 Ordinal Utilit

Early economists of the Spanish Scholastic tradition of the 1300s

and 1400s described the economic value of goods as deriving
directly from this property of usefulness and based their theories
on prices and monetary exchanges

This conception of utility was not quanti ed, but a qualitative

property of an economic good. Later economists, particularly
those of the Austrian School, developed this idea into an ordinal
theory of utility, or the idea that individuals could order or rank the
usefulness of various discrete units of economic goods

Austrian economist Carl Menger, in a discovery known as the

marginal revolution, used this type of framework to help him
resolve the diamond-water paradox that had vexed many
previous economists. Because the rst available units of any
economic good will be put to the most highly valued uses, and
subsequent units go to lower-valued uses, this ordinal theory of
utility is useful for explaining the law of diminishing marginal utility
and fundamental economic laws of supply and demand

Cardinal Utilit

To Bernoulli and other economists, utility is modeled as a

quanti able or cardinal property of the economic goods that a
person consumes. To help with this quantitative measurement of
satisfaction, economists assume a unit known as a “util” to
represent the amount of psychological satisfaction a speci c good
or service generates for a subset of people in various situations
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The concept of a measurable util makes it possible to treat

economic theory and relationships using mathematical symbols
and calculations

However, it separates the theory of economic utility from actual

observation and experience, since “utils” cannot actually be
observed, measured, or compared between different economic
goods or between individuals

If, for example, an individual judges that a piece of pizza will yield
10 utils and that a bowl of pasta will yield 12 utils, that individual
will know that eating the pasta will be more satisfying. For the
producers of pizza and pasta, knowing that the average bowl of
pasta will yield two additional utils will help them price pasta
slightly higher than pizza

Additionally, utils can decrease as the number of products or

services consumed increases. The rst slice of pizza may yield 10
utils, but as more pizza is consumed, the utils may decrease as
people become full. This process will help consumers understand
how to maximize their utility by allocating their money between
multiple types of goods and services as well as help companies
understand how to structure tiered pricing

Total Utilit

If utility in economics is cardinal and measurable, the total utility

(TU) is de ned as the sum of the satisfaction that a person can
receive from the consumption of all units of a speci c product or
service. Using the example above, if a person can only consume
three slices of pizza and the rst slice of pizza consumed yields
ten utils, the second slice of pizza consumed yields eight utils,
and the third slice yields two utils, the total utility of pizza would be
twenty utils
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Marginal Utility

Marginal utility (MU) is de ned as the additional (cardinal) utility

gained from the consumption of one additional unit of a good or
service or the additional (ordinal) use that a person has for an
additional unit.

Using the same example, if the economic utility of the rst slice of
pizza is ten utils and the utility of the second slice is eight utils, the
MU of eating the second slice is eight utils. If the utility of a third
slice is two utils, the MU of eating that third slice is two utils

In ordinal utility terms, a person might eat the rst slice of pizza,
share the second slice with their roommate, save the third slice
for breakfast, and use the fourth slice as a doorstop

How Do You Measure Economic Utility?

While there is no direct way to measure the utility of a certain

good for an individual consumer, it is possible to estimate utility
through indirect observation. For example, if a consumer is willing
to spend $1 for a bottle of water but not $1.50, economists can
safely state that a bottle of water has economic utility somewhere
between $1 and $1.50. However, this becomes dif cult in practice
because of the number of variables that are present in a typical
consumer's choices

What Are the 4 Types of Economic Utility

In behavioral economics, the four types of economic utility are

form utility, time utility, place utility, and possession utility. These
terms refer to the psychological importance attached to different
forms of utility. For example, form utility is the result of the design
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of a product or service, and time utility refers to the ability of a

company to provide services when the customers need them

How Do You Invest in Utilities

Utilities are companies that operate in the electric, water, oil, or

gas sectors. These companies play a major role in industrial
economies and have a total market capitalization of nearly $1.6
trillion. In addition to investing in individual companies, there are
also many targeted funds that are invested in a basket of utilities-
sector companies

The Bottom Line

Utility can be used to measure the usefulness of goods and

services to consumers. While there are limitations when more
variables and differences appear in the market, various types of
economic utility continue to be examined. Not only can it help
companies with structuring their tiered pricing but it can also help
consumers learn how to boost the utility of their purchases

Law of Diminishing Marginal Utility

The law of diminishing marginal utility is the foundation stone of

utility analysis. It means that the value of a good, the extra utility
derived from the good, declines as more of the good is
consumed. If satisfaction is obtained from a good decline, then
buyers are willing to pay a lower price. Hence, demand price is
inversely related to the quantity demanded which is the law of
demand. It is based on certain assumptions

• All the units of the commodity are completely homogeneous.

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 • Utility is a psychological concept, and it varies from person to

person.

• The consumer's taste is constant.

• There is no change in the price of the goods or of their

substitutes.

• The unit can be measured.

• The consumer is a rational human being, and he strives for

maximum satisfaction

Law of Demand

The law of demand is one of the most fundamental concepts in

economics. It works with the law of supply to explain how market
economies allocate resources and determine the prices of goods
and services that we observe in everyday transactions

The law of demand states that the quantity purchased varies

inversely with price. In other words, the higher the price, the lower
the quantity demanded. This occurs because of diminishing
marginal utility. That is, consumers use the rst units of an
economic good they purchase to serve their most urgent needs
rst, then they use each additional unit of the good to serve
successively lower-valued ends

Understanding the Law of Deman

Economics involves the study of how people use limited means to

satisfy unlimited wants. The law of demand focuses on those
unlimited wants. Naturally, people prioritize more urgent wants
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 and needs over less urgent ones in their economic behavior, and
this carries over into how people choose among the limited
means available to them. For any economic good, the rst unit of
that good that a consumer gets their hands on will tend to be used
to satisfy the most urgent need the consumer has that that good
can satisfy

For example, consider a castaway on a desert island who

obtains a six-pack of bottled fresh water washed up onshore. The
rst bottle will be used to satisfy the castaway’s most urgently felt
need, most likely drinking water to avoid dying of thirst. The
second bottle might be used for bathing to stave off disease, an
urgent but less immediate need. The third bottle could be used for
a less urgent need, such as boiling some sh to have a hot meal,
and on down to the last bottle, which the castaway uses for a
relatively low priority like watering a small potted plant to keep him
company on the island

In our example, because each additional bottle of water is used

for a successively less highly valued want or need by our
castaway, we can say that the castaway values each additional
bottle less than the one before. Similarly, when consumers
purchase goods on the market, each additional unit of any given
good or service that they buy will be put to a less valued use than
the one before, so we can say that they value each additional unit
less and less. Because they value each additional unit of the good
less, they are willing to pay less for it. So the more units of a good
that consumers buy, the less they are willing to pay in terms of the
price

By adding up all the units of a good that consumers are willing to

buy at any given price, we can describe a market demand curve,
which is always sloping downward, like the one shown in the chart
below. Each point on the curve (A, B, C) re ects the quantity
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 demanded (Q) at a given price (P). At point A, for example, the
quantity demanded is low (Q1) and the price is high (P1). At
higher prices, consumers demand less of the good, and at lower
prices, they demand more

Demand vs. Quantity Demanded

In economic thinking, it is important to understand the difference

between the phenomenon of demand and the quantity demanded.
In the chart, the term “demand” refers to the light blue line plotted
through A, B, and C. It expresses the relationship between the
urgency of consumer wants and the number of units of the
economic good at hand. A change in demand means a shift of the
position or shape of this curve; it re ects a change in the
underlying pattern of consumer wants and needs vis-à-vis the
means available to satisfy them

On the other hand, the term “quantity demanded” refers to a point

along the horizontal axis. Changes in the quantity demanded
strictly re ect changes in the price, without implying any change in
the pattern of consumer preferences. Changes in quantity
demanded just mean movement along the demand curve itself
because of a change in price. These two ideas are often
con ated, but this is a common error—rising (or falling) prices do
not decrease (or increase) demand; they change the quantity
demanded

Factors Affecting Demand

So what does change demand? The shape and position of the

demand curve can be impacted by several factors. Rising
incomes tend to increase demand for normal economic goods, as
people are willing to spend more. The availability of close
substitute products that compete with a given economic good will
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 tend to reduce demand for that good, since they can satisfy the
same kinds of consumer wants and needs. Conversely, the
availability of closely complementary goods will tend to increase
demand for an economic good, because the use of two goods
together can be even more valuable to consumers than using
them separately, like peanut butter and jelly

Other factors such as future expectations, changes in background

environmental conditions, or changes in the actual or perceived
quality of a good can change the demand curve because they
alter the pattern of consumer preferences for how the good can
be used and how urgently it is needed

Law of Supply

Supply is the total amount of a speci c good or service that is

available to consumers at a certain price point. As the supply of a
product uctuates, so does the demand, which directly affects the
price of the product. The law of supply, then, is a microeconomic
law stating that, all other factors being equal, as the price of a
good or service rises, the quantity that suppliers offer will rise in
turn (and vice versa). Ergo, when demand exceeds the available
supply, the price of a product will typically rise. Conversely, should
the supply of an item increase while the demand remains the
same, the price will go down.

Explanation of the law of deman

The law of demand tells us that if more people want to buy

something, given a limited supply, the price of that thing will be bid
higher. Likewise, the higher the price of a good, the lower the
quantity that will be purchased by consumers
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 Why is the law of demand important?

Together with the law of supply, the law of demand helps us

understand why things are priced at the level that they are, and to
identify opportunities to buy what are perceived to be underpriced
(or sell overpriced) products, assets, or securities. For instance, a
rm may boost production in response to rising prices that have
been spurred by a surge in demand
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