Demand, Supply & Market Structures Notes

Last reviewed 30 Sept 2026 · 8 min read

Utility

Utility is the want-satisfying power of a good.

Total utility (TU): the total satisfaction from consuming a given quantity. Marginal utility (MU): the addition to total utility from consuming one more unit: $M U = Δ T U /Δ Q$ .
Law of diminishing marginal utility (Gossen's first law): as a consumer consumes more units of a good, the marginal utility from each successive unit falls. TU rises at a decreasing rate until MU = 0 (the maximum TU, the point of satiety), after which MU is negative.
Law of equi-marginal utility (Gossen's second law): a consumer maximises satisfaction when the ratio of marginal utility to price is equal for all goods: $\frac{M U _{x}}{P _{x}} = \frac{M U _{y}}{P _{y}}$ .
Consumer's surplus (Marshall): the difference between what a consumer is willing to pay and what he actually pays. Indifference curves (Hicks and Allen) show combinations of two goods giving the same satisfaction; the budget line shows what he can afford; equilibrium is where the budget line is tangent to the highest indifference curve.

Demand

Demand is the quantity of a good a consumer is willing and able to buy at a given price over a given time. Effective demand needs the ability to pay.

Law of demand: other things being equal, when the price of a good rises, the quantity demanded falls, and vice versa — an inverse relationship; the demand curve slopes downward (left to right).

Reasons: the income effect, the substitution effect, and diminishing marginal utility.
Exceptions to the law of demand: Giffen goods (inferior goods whose demand rises when the price rises — Sir Robert Giffen, coarse grains in Ireland), Veblen goods (status symbols, luxuries — demand rises when the price rises), expectations of a further price rise, and necessities in an emergency.

Determinants of demand

Price of the good; income of the consumer (normal goods vs inferior goods); prices of related goods (substitutes — tea and coffee; complements — car and petrol); tastes and preferences; population; expectations; advertising, seasonal factors and distribution of income.

Movement vs shift

Movement along the curve (expansion or contraction of demand): caused by a change in the price of the good itself.
Shift of the curve (increase or decrease in demand): caused by a change in any other determinant. A rightward shift is an increase; a leftward shift a decrease.

Elasticity of demand

Price elasticity of demand ( $E_{d}$ ) measures the responsiveness of quantity demanded to a change in price:

E_{d} = \frac{% change in quantity demanded}{% change in price}

(ignoring the negative sign).

Value	Type	Meaning	Examples
$E_{d} = 0$	perfectly inelastic	quantity does not change	life-saving drugs
$E_{d} < 1$	inelastic (less elastic)	quantity changes less than price	necessities — salt, wheat, medicines
$E_{d} = 1$	unitary elastic	proportional change
$E_{d} > 1$	elastic (more elastic)	quantity changes more than price	luxuries — cars, jewellery, air travel
$E_{d} = \infty$	perfectly elastic	any small price change → infinite change in demand	perfect competition (a firm's demand curve)

Determinants: availability of substitutes (more substitutes → more elastic), nature of the good (necessity or luxury), the share of income spent, time period (elasticity is greater in the long run), and habit.

Total expenditure method: when the price falls — if total expenditure rises, demand is elastic; if it is unchanged, unitary; if it falls, inelastic.

Income elasticity of demand $E_{y} = \frac{%Δ Q}{%Δ income}$ : positive for normal goods (greater than 1 for luxuries), negative for inferior goods.
Cross elasticity of demand $E_{c} = \frac{%Δ Q _{A}}{%Δ P _{B}}$ : positive for substitutes, negative for complements, zero for unrelated goods.

Worked ExampleExample — price elasticity

The price of a good falls from ₹ 20 to ₹ 16 (a 20 % fall) and the quantity demanded rises from 100 to 130 units (a 30 % rise).

$E_{d} = \frac{30%}{20%} = 1.5$ — elastic (greater than 1). Total expenditure rises from $20 \times 100 = 2000$ to $16 \times 130 = 2080$ rupees, which agrees with the total-expenditure test: a price fall with a rise in expenditure means elastic demand.

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Demand, Supply & Market Structures