ECONOMIC BUSINESS ENVIRONMENT - ICSI

1 ECONOMIC &BUSINESSENVIRONMENTC hapter1 Basics of Demand andSupply and Forms ofMarket Competition12 National IncomeAccounting and RelatedConcepts223 Indian Union Budget394 Indian Financial Markets515 Indian Economy886 Entrepreneurship Scenario1087 BUSINESS Environment1208 Key GovernmentInstitutions136 Lesson 1 BASICS OF DEMANDANDSUPPLYAND FORMSOFMARKETCOMPETITION1 ECONOMIC & BUSINESS Environment2 THEORY OF DEMAND AND SUPPLYM eaning of DemandDemand is an ECONOMIC principle referring to a consumer's desire to purchase goods and servicesand willingness to pay a price for a specific good or of DemandAccording to the law of demand, other things being equal, if price of a commodity falls, the quantitydemanded of it will rise, and if price of the commodity rises, its quantity demanded will decline.

2 Itimplies that there is an inverse relationship between the price and quantity demanded of a commodity,.In other words, other things being equal, quantity demanded will be more at a lower price than athigher law of demand describes the functional relationship between price and quantity various factors affecting demand, price of a commodity is the most critical factor. Thus,demand of a commodity is mainly determined by the price of = f(Px).The law of demand may be understood from the following example: PRICE PER CAN (INR)QUANTITY DEMANDED80070200604005060040800301000201 20010140001600 ECONOMIC & BUSINESS Environment3 Source: Economics OnlineThus, it may be observed that with the rise in price per can, the demand for the cans is of the law of demandThe above stated law of demand is conditional.

3 It is based on certain conditions as given. It is therefore,always stated with the other things being equal . It relates to the change in price variable only,assuming other determinants of demand to be constant. The law of demand is thus, based on thefollowing ceteris paribus assumptions:1. No Change in Consumer s Income2. No Change in Consumer s Preferences3. No Change in the Fashion4. No Change in the Price of Related Goods5. No Expectation of Future Price Changes or Shortages6. No Change in Size, Age Composition and Sex Ratio of the Population7. No Change in the Range of Goods Available to the Consumers8. No Change in the Distribution of Income and Wealth of the Community9.

4 No Change in Government Policy10. No Change in Weather ConditionsEconomic & BUSINESS Environment4 EXCEPTIONS TO THE LAW OF DEMANDT here are few exceptional cases where the law of demand is not applicable, which may be categorisedas follows:Giffen Goods : In the case of certain inferior goods called Giffen goods (named after Sir RobertGiffen), when the prices fall, quite often less quantity will be purchased than before because of thenegative income effect and people s increasing preference for a superior commodity with the risein their real income. Examples of Giffen goods can include bread, rice, and of Snob Appeal : Sometimes, certain commodities are demanded just because theyhappen to be expensive or prestige goods, and have a snob appeal.

5 They satisfy the aristocraticdesire to preserve exclusiveness for unique : When people speculate about changes in the price of a commodity in the future,they may not act according to the law of demand at the present price, say, when people areconvinced that the price of a particular commodity will rise still further, they will not contracttheir demand with the given price rise: on the contrary, they may purchase more for the purposeof s Psychological Bias or Illusion : When the consumer is wrongly biased against thequality of the commodity with the price change, he may contract this demand with a fall in of SupplySupply represents how much the market can offer. The quantity supplied refers to the amount of agood producers are willing to supply when receiving a certain price.

6 The supply of a good or servicerefers to the quantities of that good or service that producers are prepared to offer for sale at a set ofprices over a period of time. Supply means a schedule of possible prices and amounts that would besold at each price. The supply is not the same concept as the stock of something in existence, forexample, the stock of commodity X in Delhi means the total quantity of Commodity X in existence ata point of time; whereas, the supply of commodity X in Delhi means the quantity actually being offeredfor sale, in the market, over a specified period of law of supply states that a firm will produce and offer to sell greater quantities of a product orservice as the price of that product or service rises, other things being equal.

7 There is direct relationshipbetween price and quantity supplied. In this statement, change in price is the cause and change insupply is the effect. Thus, the price rise leads to increase in supply and not otherwise. It may be notedthat at higher prices, there is greater incentive to the producers or firms to produce and sell things include cost of production, change of technology, prices of inputs, level of competition,size of industry, government policy and non- ECONOMIC Ceteris Paribus (a) With an increase in the price of a good, the producer is willing to offer more quantity in themarket for & BUSINESS Environment5(b) The quantity supplied is related to the specified time interval over which it is law of supply is the microeconomic law that states that, all other factors being equal, as the priceof a good or service increases, the quantity of goods or services that suppliers offer will increase, andvice versa.

8 The law of supply says that as the price of an item goes up, suppliers will attempt to maximizetheir profits by increasing the quantity offered for of Law of SupplyThe term other things remaining the same refers to the following assumptions in the law of supply:1. No change in the state of No change in the price of factors of No change in the number of firms in the No change in the goals of the No change in the seller s expectations regarding future No change in the tax and subsidy policy of the No change in the price of other equilibrium price is the market price where the quantity of goods supplied is equal to the quantityof goods demanded. This is the point at which the demand and supply curves in the market : & BUSINESS Environment6At equilibrium, there is no shortage or surplus unless a determinant of demand or a determinant ofsupply changes.

9 If a change in the price of a good or a service creates a shortage, it means thatconsumers want to buy a higher quantity than the one offered by producers. In this case, demandexceeds supply and consumers are not satisfied. In contrast, if a change in the price of a product or aservice creates a surplus, it means that consumers want to buy less quantity than the one offered byproducers. In this case, supply exceeds demand and producers need to lower the price of the productor the service to avoid excessive us take an example to understand the : My Accounting CourseIn the table above, the quantity demanded is equal to the quantity supplied at the price level of $ , the price of $60 is the equilibrium price.

10 At any other price level, there is either surplus orshortage. Specifically, for any price that is lower than $60, the quantity supplied is greater than thequantity demanded, thereby creating a surplus. For any price that is higher than $60, the quantitydemanded is greater than the quantity supplied, thereby creating a OF DEMANDIn economics, the demand elasticity ( elasticity of demand) refers to how sensitive the demand for agood is to changes in other ECONOMIC variables, such as prices and consumer elasticity is calculated as the percent change in the quantity demanded divided by a percentchange in another ECONOMIC variable. A higher demand elasticity for an ECONOMIC variable meansthat consumers are more responsive to changes in this variable.