Economy

© Sarrthi IAS 9569093856 Economy Foundation Module 1

 Definition: Quantity of a good/service producers are
Supply and willing and able to supply at different prices over a
Supply Curve specific time.

Ceteris Paribus: As price ↑, quantity

supplied ↑; as price ↓, quantity supplied ↓.

Law of Supply:

Why? Higher prices = greater profit

potential → motivates higher output.

Non-Price Determinants of Supply

↑ Costs → ↓ Supply.

↓ Costs → ↑ Supply.

Supply Cost of Factors of Production:

Competitive
Supply: Resources
shift to more
profitable goods.
E.g.: ↑ Price of
skateboards →
More skateboards,
fewer roller skates.

Price of
Related Goods:

Joint Supply:
Producing one good
results in a by-product.
E.g.: Petrol and diesel
production from crude
oil.

© Sarrthi IAS Economy Foundation Module 1

 Non Price Determinants

Indirect Taxes: ↑ Costs → ↓ Supply

(curve shifts upward).

Subsidies: ↓ Costs → ↑ Supply

(curve shifts downward).

Government Intervention:

Supply ↑ Expected future price → ↓

Current supply to sell later.

↓ Expected future price → ↑

Current supply to avoid losses.
Expectations about
Future Prices:

Improved technology → ↑ Supply

Technological Changes:
(rightward shift).

Favorable weather → ↑ Supply

(agriculture).
Weather/Natural Disasters:
Poor weather or disasters → ↓
Supply.

↑ Firms in the market → ↑ Supply.

Market Size:
↓ Firms → ↓ Supply.

© Sarrthi IAS Economy Foundation Module 2

 Definition: Measures the
responsiveness of quantity
supplied to changes in price.

What is Price PES= Percentage Change in Price /

Elasticity of Supply Percentage Change in Quantity S
(PES)? upplied

Purpose: Indicates how easily

producers can adjust supply in
response to price changes.

Range of PES Values

Supply does not change

regardless of price changes.
Perfectly Inelastic Supply
(PES = 0):
Example: Fixed seating in a
stadium.

Infinite supply at a specific price;

supply drops to zero if price
changes slightly.
Perfectly Elastic Supply
Supply (PES = ∞):
Example: Commodities in
international trade at a set world
price.

Supply changes less than

proportionally to price changes.
Inelastic Supply (PES < 1):
Example: Electricity supply or
agricultural goods.

Supply changes more than

proportionally to price changes.
Elastic Supply (PES > 1):
Example: Manufactured goods
like clothing.

Supply changes proportionally to

price changes.
Unit Elastic Supply (PES = 1):
Example: Straight-line supply
curve through the origin.

© Sarrthi IAS Economy Foundation Module 3

 Determinants of Price Elasticity of
Supply

Supply is inelastic as higher costs

High Cost Increases:
discourage expansion.

Supply is elastic; producers can

Low Cost Increases:
scale output at minimal cost.

Cost Increase High spare

with Output Unused Capacity: capacity →
Expansion Elastic supply.
Influencing Factors:
Full capacity → Inelastic supply.

Easy resource reallocation →

Elastic supply.
Mobility of Factors:
Rigid production processes →
Inelastic supply.

No time for
production
Immediate Period:
adjustments →
Supply PES is inelastic.

Some factors (e.g., labor) adjusted;

Time Period
Short Run: limited flexibility → Moderately
Considered
elastic.

All factors adjustable → PES is

Long Run:
highly elastic.

Firms release
High Storage Capability: inventory quickly →
Elastic supply.
Ability to Store Stock
Perishable goods or
Low Storage Capability: no stock → Inelastic
supply.

Anticipate price changes → Adjust

output to maximize profits.
For Firms:
Example: Manufacturers scaling
up during anticipated demand
spikes.
Applications of PES
Market interventions like price
controls or subsidies depend on
PES analysis.
For Governments:
Example: Ensuring food security
by considering agricultural PES
when setting minimum support
prices.

© Sarrthi IAS Economy Foundation Module 4

 Definition: A state of balance
where quantity demanded equals
quantity supplied.

Market Equilibrium

No excess supply (surplus) or

demand (shortage).
Key Features:
No pressure for the price to
change.

The price at which demand and

supply curves intersect.
Equilibriu
m Price: Known as the market price or
Components of Market market-clearing price, ensuring
Equilibrium all goods produced are sold.

Market Equilibrium The quantity of goods exchanged

Quantity: at the equilibrium price.
Equilibrium
Efficient At equilibrium, resources are
Allocation of utilized optimally, achieving the
Resources: best allocation for society.
Characteri
In the absence of external
stics of
Self-Sustaining: disruptions, the market remains
Equilibriu
at equilibrium.
m
In a free competitive market, any
disequilibrium (excess demand or
Dynamic supply) is temporary.
Adjustment:
Price adjusts through market
forces to restore equilibrium.

Occurs when price is above

equilibrium.
Excess Supply
(Surplus): Producers reduce prices to sell
excess goods, moving towards
Market equilibrium.
Adjustments to
Disequilibrium Occurs when price is below
Excess equilibrium.
Demand
(Shortage): Consumers compete for limited
goods, driving prices upward
towards equilibrium.

© Sarrthi IAS Economy Foundation Module 5

 Economy

© Sarrthi IAS 9569093856 Economy Foundation Module 55