Supply and Demand: Fundamental Economic Concepts – JAIIB Paper 1 Module B Guide
Understanding supply and demand is fundamental for JAIIB Paper 1 Module B. These concepts form the basis of market economics and price determination.
Law of Demand
The law of demand states that when the price of a good increases, the quantity demanded decreases, and vice versa, assuming other factors remain constant.
Determinants of Demand:
- Price of the good
- Consumer income
- Prices of related goods (substitutes and complements)
- Consumer preferences
- Consumer expectations
- Number of buyers
Law of Supply
The law of supply states that when the price of a good increases, the quantity supplied also increases, and vice versa.
Determinants of Supply:
- Price of the good
- Cost of production
- Technology
- Prices of related goods
- Producer expectations
- Number of sellers
Market Equilibrium
Market equilibrium occurs when quantity demanded equals quantity supplied. At this point, the market clears with no shortage or surplus.
Equilibrium Price:
- Also called market-clearing price
- Determined by intersection of supply and demand curves
- Changes when supply or demand shifts
Elasticity of Demand and Supply
Elasticity measures responsiveness of quantity to price changes. This concept is crucial for understanding consumer behavior and business decisions.
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