Indian Economy ,Demand and Elasticity , Supply

Economy is the study of labour, land, income, production, taxes, investment and government expenditures.


On the other hand, economics is the study of how societies are scare resources to produce valuable commodities and distribute them among different people.


Adam Smith is considered as the ‘Father of Economics’ due to his enormous work in the field of economy. His famous work Wealth of Nations (1776) is the origin of capitalistic form of economy.

Meaning of Economics

The term ‘economics’ comes from the Greek term Oikonomos, which is composed of oikos (house) and nomos (custom or law), meaning Rules of the Household.

Economics is the social science that studies economic activities to gain an understanding of the processes that govern the production, distribution and consumption of goods and services in an economy.

Branches of Economics

Traditionally, economics has been divided into the two main branches.

1. Micro Economics

It is concerned with how supply and demand interact in individual market and how these interactions determine the price level of goods and services.

2. Macro Economics

It studies the economy as a whole and its features like national income, employment, poverty, balance of
payments and inflation.

Types of Economies

The following are the major types of

1. Mixed Economy

This type of economy consists of a combination of public sector and private sector units. Here, the government is the decision-maker for the public sector and individuals, and businessmen make decisions for
the private sector.

2. Open Economy

An economy is said to be open, if it has trade with other economies. In this economy, market is mostly free from trade barriers and where exports and imports form a large percentage of the GDP.

3. Closed Economy

An economy is said to be closed, if it has no trade or trade area with other  economies. In this economy,
the consumer get everything within the economic borders and government acts as the arbitrator, articulator and facilitator. It is like centrally planed economy.



Indian Economy

Indian economy is the 6th largest in the world by nominal GDP and 3rd largest by Purchasing Power Pariety(PPP).

Indian economy is mixed economy where existence of both public and private sectors is found and comes under category of developing country 1n the classification of country on the basis of economic development.

Sectors of Indian Economy

There are three major sectors of Indian Economy which are as under

1. Primary Sector Includes those activities which are related to the exploitation of nature. e.g. agriculture, forestry and fishing

2. Secondary Sector Includes those activities which involves manutacturing and production ot primary goods into finished goods. e-g. mining, manufacturing electricity ,gas and water supply, construction etc.

3. Tertiary Sector This sector generally provides services, instead of goods to other sectors and sometimes referred to as service sector. e.g. business, transport, telecommunication, banking, insurance, real estate,
community and personal services, teaching, hotels and restaurants etc.
Other minor sectors includes
1. Quaternary sector
2. Quinary sector,
3. Commodity and Non-commodity sector and
4. Organised and Unorganised sector

Demand and Elasticity

Demand It may be defined as different quantities of a commodity that a consumer is willing to buy at different prices at a given point of time.

Law of Demand According to it, “Quantity demanded is  inversely related to the price of the commodity i.e. demand increases when price decreases and vice-versa.

Elasticity of Demand The elasticity of demand measures the responsiveness of the quantity demanded of a good, to change in its price, price of other goods and changes in consumers income.

Price Elasticity of Demand It is the responsiveness of demand to change in price or it is measured as percentage change in quantity demanded divided by the percentage change in price.

Theory of Consumer Behaviour

Utility It is the capacity of a commodity to satisfy human wants. It is defined as a want satisfying power of a commodity.

The Law of Diminishing marginal utility This Law states that as a consumer increases the consumption of a commodity, the utility from each successive unit goes on diminishing.

Consumer Surplus It is the difference between the total amount that consumer are willing and able to pay for a good or service and the total amount that they actually do pay (i.e. the market price).

Consumer Equilibrium A consumer is in equilibrium when he is driving maximum possible satiable satisfaction from the goods and is in no position to rearrange his purchase of goods.


Professor Thomas has analyse supply as
“The supply of Goods is the quantity offered for sale in a market at a given time at various prices.”

Production Function

It states the relationship between inputs and outputs, not merely relation, it should be functional and
quantitative relationship.

In other words it is the technical relation between a firm’s production (output) and the material factors of
production (input). It is expressed in the following
form Qx = f(L,K) Qx = Commodity x
L = Labour K= Capital

Various Concepts of Product

1. Total Product (TP) As can be understood from the name itself, TP is the total quantity of goods produced by a firm during a specific time period. It can be increased by increasing the quantity of variable factor.

2. Marginal Product (MP) It is the change in the T.P. by producing one more unit of output. i.e. That is, it is the difference made to T.P. from the
use of an additional unit of variable factor (labour).
M.P. – T.P.n – T.P.n-1 where n= number of units produced

3. Average Product (AP) It is the amount of output per unit of the various factor employed

Law of Variable Proportions

When more and more units of variable factor are used to increase the production ,Law of Variable
Proportions or Law of Returns to a factor is In such a case (TP) Total Product (AP) Average
Product and (MP) Marginal Product pass through 3 stage.

I Stage During the first stage, total product, avow product and marginal product rise because of increasing returns.

II Stage During the second stage total product rise but at a diminishing rate and marginal product and average product falls. Total Product 1s maximum when marginal product is zero.

III Stage During the third stage when the total product declines, marginal product is negative. In other words
total product, average product, and marginal product falls during the third stage.

Cost Function

The cost function reters to the mathematical relation between cost of a product and the various determinants of costs.

Short Run Cost

It is a period of time in which output can be increased or decreased by changing only the amount of variable
factors, such as labour, raw material etc. Some of the factors of production cannot be varied, and therefore,remain fixed.

The cost that a firm incurs to employ these fixed inputs is called the Total Fixed Cost (TFC). To produce any required level of output, the firm, in the short run, can adjust only variable inputs. Accordingly, the called the Total Variable Cost (TVC). Additionally the fixed cost that a firm incurs to employ these variable inputs is and the variable costs, we get the total cost (TC) of a firm,
Hence, TC = TVC + TFC

Short Run Average Cost (SAC)

It is incurred by the firm and defined as the total cost per unit of output. We calculate is as TC where, ‘qis quality of output
SAC =TC/q where ,q is quality of output

Similarly, average fixed cost, average variable cost, average total and short run marginal cost are defined as

(i) Average Fixed Cost (AFC) It is the total fixed cost divided by the number of units of output produced
i.e AFC = TFC/Q where Q is the number of units produce.

(ü) Average Variable Cost (AVC) It is the total variable cost divided by the number of units of output produced i.e. AVC = TVC/Q where Q is the number of units produce..

(ii) Average Total Cost (ATC) It is a sum of average variable cost and average fixed cost i.e. ATC = AFC +
AVC. It is the total cost divided by the number of units produced

(iv) Marginal Cost (MC) It is the addition made to the total cost by production of an additional unit of
output. Marginal cost is independent of fixed cost. Marginal cost curve of a firm is ‘U’ shaped. Variable
cost is related to marginal cost.

Long Run Cost Long run is a period of time in which the inputs of all factors may be varied. Thus, all factors becom variable in the long run. A long run cost curve depicts the functional relationship between output and the long run cost of production.

Long Run Average Cost Curve Long Run average cost curve is often called a ‘planning curve.’

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