Demand, Supply and Elasticity: Law of Demand, Equilibrium Price, Price Elasticity Formulas for SSC CGL Finance and Economics

Demand and supply are the foundation of microeconomics, and the SSC CGL Finance and Economics paper asks direct questions on the laws, the shifts of the curves, the equilibrium and the elasticity of demand. This guide on demand, supply and elasticity for SSC covers the laws and their exceptions, the factors affecting demand and supply, the equilibrium, all types of elasticity and the formulas, with solved examples and practice questions.

Law of Demand

Other things being equal, when the price of a good falls, the quantity demanded rises, and when the price rises, the quantity demanded falls. There is an inverse relation between price and quantity demanded, so the demand curve slopes downwards.

Exceptions to the Law of Demand

• Giffen goods: inferior goods such as coarse grain for which demand falls when the price falls (Sir Robert Giffen).
• Veblen goods: luxury goods bought for prestige (diamonds, designer items), whose demand rises with price.
• Expectation of a further price rise or fall.
• Necessities such as salt, whose demand does not change much.

Determinants of Demand

A change in price causes a movement along the curve; a change in any other factor causes a shift of the curve.

Law of Supply

Other things being equal, when the price of a good rises, the quantity supplied rises. The supply curve slopes upwards. Supply shifts with changes in the cost of production, technology, prices of related goods, taxes and subsidies.

Equilibrium Price

The market is in equilibrium where the quantity demanded equals the quantity supplied. If the price is above the equilibrium, there is a surplus and the price falls; if it is below, there is a shortage and the price rises.

Price Elasticity of Demand

Elasticity of demand measures how much the quantity demanded changes when the price changes.

E_d = (% change in quantity demanded) / (% change in price) = (ΔQ/Q) / (ΔP/P) = (ΔQ/ΔP) × (P/Q)

Factors Affecting Elasticity

• Nature of the good: necessities are inelastic; luxuries are elastic.
• Availability of substitutes: more substitutes make the demand more elastic.
• Share of the good in the consumer’s income.
• Time period: demand is more elastic in the long run.
• Habits and addiction make the demand inelastic.

Total Expenditure Method

Other Elasticities

Solved Examples

Example 1. When the price falls from 10 to 8, the quantity demanded rises from 100 to 120. Find the price elasticity.
% change in price = 20% fall; % change in quantity = 20% rise. E_d = 20/20 = 1 (unitary).

Example 2. Demand is Q = 50 − 2P. Find the elasticity at P = 10.
Q = 30. ΔQ/ΔP = −2. E_d = −2 × 10/30 = −0.67, so the magnitude is 0.67, which is inelastic.

Example 3. Demand is Q_d = 100 − 2P and supply is Q_s = 20 + 2P. Find the equilibrium price and quantity.
100 − 2P = 20 + 2P gives 80 = 4P, so P = 20. Q = 100 − 40 = 60.

Example 4. The demand for a good rises 10% when the income rises 5%. Find the income elasticity.
10/5 = 2, a luxury good.

Quick Tips

• Learn the difference between movement and shift.
• Learn the five types of elasticity with their values.
• Use the total expenditure method for quick elasticity checks.
• Solve equilibrium questions by equating Qd and Qs.

Quick Revision Points

• Law of demand: price and quantity are inversely related.
• Giffen and Veblen goods are exceptions.
• E_d = (ΔQ/Q)/(ΔP/P).
• Necessities have inelastic demand; luxuries have elastic demand.
• Equilibrium is where Qd = Qs.

Practice Questions With Answers

1. What is the shape of the demand curve according to the law of demand?
   Answer: Downward sloping
2. Which goods are an exception to the law of demand (inferior goods)?
   Answer: Giffen goods
3. If E_d = 0, what is the demand called?
   Answer: Perfectly inelastic
4. Qd = 80 − P and Qs = 2P − 10. Find the equilibrium price.
   Answer: 30
5. What is the elasticity if a 10% fall in price leads to a 20% rise in demand?
   Answer: 2
6. What type of goods has negative income elasticity?
   Answer: Inferior goods
7. What is the cross elasticity for substitutes?
   Answer: Positive
8. A maximum legal price is called what?
   Answer: Price ceiling
9. What happens when the price is above the equilibrium?
   Answer: Surplus
10. Which factor causes a movement along the demand curve?
    Answer: Change in the price of the good

How to Practise This Chapter

Practise 10 questions every day and write the steps on paper. Then attempt timed sets from our practice papers and the previous year papers page. See all topics on the Finance and Economics notes page and the next topic Production and Cost Theory.

Frequently Asked Questions

What is the law of demand?

When the price of a good falls, the quantity demanded rises, other things being equal.

What is the law of supply?

When the price of a good rises, the quantity supplied rises, other things being equal.

What are Giffen goods?

Inferior goods whose demand falls when the price falls.

What is the equilibrium price?

The price at which the quantity demanded equals the quantity supplied.

What is the price elasticity of demand?

The responsiveness of the quantity demanded to a change in price.

When is demand elastic?

When the elasticity is greater than 1.

What is a shift of the demand curve?

A movement of the whole curve caused by a factor other than price.

What is income elasticity of demand?

The responsiveness of demand to a change in income.

What is cross elasticity of demand?

The responsiveness of the demand for one good to a change in the price of another.

What is a price floor?

A minimum legal price, such as the minimum support price for crops.

Is this topic asked in SSC CGL?

Yes. It is a core part of the Finance and Economics paper.

How do I find elasticity from the equation?

Use (ΔQ/ΔP) × (P/Q).