The Price Puzzle What Drives the Market Class 9 Notes SST Chapter 9

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Class 9 The Price Puzzle What Drives the Market Notes

Class 9 SST Chapter 9 The Price Puzzle What Drives the Market Notes

Class 9 SST Chapter 9 Notes – The Price Puzzle What Drives the Market Notes Class 9

Demand
Demand refers to the willingness and ability of consumers to purchase a good or service at a given price during a specific time period. It is not just a desire but must be supported by purchasing power.

Law of Demand

• The law of demand explains the relationship between price of a product and quantity demanded by consumer.
• It states that, other factors remaining constant (ceteris paribus), the quantity demanded of a product increases when its price falls and decreases when its price rises. Thus, there is an inverse relationship between the price of a product and the quantity demanded.

Individual Demand

• The quantity of a good or service that an individual consumer is willing and able to buy at different prices, keeping other factors constant, is known as individual demand.
• Individual demand is presented in the demand schedule. When this demand schedule is represented graphically, it is called the demand curve.

Example: Understanding Individual Demand
Consider the example of Srivalli, a consumer purchasing mangoes during the mango season.

• At the beginning of the season, the price of mangoes was ₹ 150 per kg. Since the price was high, purchased only 1 kg of mangoes. As more mangoes became available in the market, the price fell to ₹ 100 per kg. At this lower price, she increased her purchase to 2 kg.
• Later, when the price further declined to ₹ 50 per kg, she bought 3 kg of mangoes.
  This example shows that as the price of mangoes decreased, the quantity demanded increased, illustrating the Law of Demand.

Individual Demand Schedule

Figure: Individual demand schedule

Figure: Individual demand curve

Explanation of the Individual Demand Curve

• The vertical (Y) axis represents the price of mangoes (₹), whereas the horizontal (X) axis represents the quantity of mangoes demanded (kg).
• At a price of ₹ 150 per kg, Srivalli purchased 1 kg of mangoes, which is shown by point A.
• When the price fell to ₹ 100 per kg, she purchased 2 kg, represented by point B.
• As the price further detlined to ₹ 50 per kg, she bought 3 kg, represented by point C.
• Joining points A, B and C forms the downward-sloping line DD’, which is known as the demand curve.
• The downward-sloping demand curve shows the inverse relationship between the price of a product and the quantity demanded, assuming that other factors such as income, tastes and preferences remain constant.

Figure: Individual demand curve

Market Demand

• Market demand means the total quantity of a product that all consumers in the market are willing and able to buy at different prices during a given period.
• In other words, market demand is the sum of the individual demands of all consumers.
• The following table shows the market demand schedule of three consumers, Alex, Srivalli and Israt.

Market Demand Schedule

• The market demand is obtained by adding the quantities demanded by all three consumers at each price level (Q₁ + Q₂ + Q₃). Thus, the market demand is 6 kg at ₹ 150, 12 kg at ₹ 100 and 18 kg at ₹ 50.
• When this market demand schedule is represented graphically, it is called the market demand curve.

Figure: Market demand curve

Diminishing Marginal Utility

• To understand how consumers make purchasing decisions, it is important to study the Principle of Diminishing Marginal Utility (DMU), which forms the basis of demand.
• The diminishing marginal utility principle states that the additional satisfaction (utility) a person gets from consuming more units of the same product gradually decreases.
• As the extra satisfaction from each additional unit falls, consumers are less willing to pay a high price, causing the quantity demanded to decrease.
• Example The first slice of pizza gives high satisfaction, but each additional slice gives less satisfaction.
  Therefore, a consumer is willing to pay less for extra slices.

Determinants of Demand

• The demand for a product is not influenced by its price alone. Many other factors also affect the quantity demanded, even when the price of the product remains unchanged.
• For example, when a new model of a popular smartphone is launched, people often stand in long queues or make advance bookings to buy it, even if it is expensive. This shows that demand depends on several factors besides price.
• Some of the important determinants of demand are discussed below

Price of Related Goods
The demand for a product may change due to changes in the prices of related goods. Related goods are of two types
(i) Substitute Goods Substitute goods are goods that can be used in place of one another to satisfy the same need. When the price of one substitute rises, the demand for the other usually increases.
Example: If the price of coffee increases, many consumers switch to tea.

(ii) Complementary Goods Complementary goods are goods that are used together. An increase or decrease in the demand for one usually affects the demand for the other.
Example: An increase in the demand for printers also increases the demand for printer cartridges.

Income of the Consumer

• A consumer’s income influences the ability to purchase goods and services. An increase in income generally increases the demand for many goods, even when their prices remain unchanged.
• Example When household income increases, people can afford to buy more goods or choose better-quality products.

Taste and Preference of the Buyer

• Taste and preference refer to the likes and dislikes of consumers, which influence the demand for goods and services.
• Example: A consumer who prefers mangoes may buy them instead of oranges, even if oranges are cheaper.

Seasonality

• Seasonality refers to changes in demand due to weather conditions, festivals, or the time of the year.
• Example The demand for sweaters increases during winter.

Future Price Expectations

• Future price expectations refer to consumers’s beliefs or predictions about whether the price of a product will increase or decrease in the future.
• Example Many consumers delay purchasing durable goods before Diwali or the New Year, expecting festival discounts.

Supply
Supply refers to the quantity of a product that sellers are willing and able to offer for sale at a particular price.

Law of Supply
The law of supply explains the relationship between price of a product and the quantity supplied by producer. It states that, other factors remaining constant (ceteris paribus), the quantity supplied of a product increases when its price rises and decreases when its price falls. Thus, there is a direct relationship between the price of a product and the quantity supplied.

Individual Supply

• The quantity of a good or service that an individual seller is willing and able to offer for sale at different prices, keeping other factors constant, is known as individual supply.
• Individual supply is presented in the supply schedule. When this supply schedule is represented graphically, it is called the supply curve.

Example: Understanding Individual Supply
Consider the following example of a seller supplying mangoes during the mango season.

• At the beginning of the season, the price of mangoes was ₹ 50 per kg. Since the price was low, the seller supplied only 1 kg of mangoes.
• As the price for mangoes increased to ₹ 100 per kg. At this higher price, the seller increased the supply to 2 kg.
• Later, when the price further increased to ₹ 150 per kg, the seller supplied 3 kg of mangoes.
  This example shows that as the price of mangoes increased, the quantity supplied also increased, illustrating the Law of Supply.

Individual Supply Schedule

Individual Supply Schedule

Explanation of the Individual Supply Curve

• The vertical (Y) axis represents the price of mangoes (₹), whereas the horizontal (X) axis represents the quantity of mangoes supplied (kg).
• At a price of ₹ 50 per kg, the seller supplies 1 kg of mangoes, which is shown by point A.
• When the price rises to ₹ 100 per kg, the seller supplies 2 kg, represented by point B. As the price further increases to ₹ 150 per kg, the seller supplies 3 kg, represented by point C.
• Joining points A, B and C forms the upward-sloping line SS’, which is known as the supply curve.
• The upward-sloping Supply curve shows the direct relationship between the price of a product and the quantity supplied, assuming that other factors such as the cost of production, technology and government policies remain constant.

Market Supply

• When many sellers supply mangoes, the total quantity supplied by all sellers at different prices is known as market supply.
• In other words, market supply is the sum of the individual supplies of all sellers. The individual supply schedules of Sellers A, B and C are given below.

Supply Schedule of Sellers

The market supply is obtained by adding the quantities supplied by all three sellers at each price level (Q₁ + Q₂ + Q₃). Thus, the market supply is 6 kg at ₹ 50, 12 kg at ₹ 100 and 18 kg at ₹ 150. When this market supply schedule is represented graphically, it forms the market supply curve.

Figure: Individual supply curve (a) and market supply curve (b)

Determinants of Supply
The supply of a product does not depend only on its price. Several other factors also influence the quantity that producers are willing to supply, even when the price of the product remains unchanged. Some of the important determinants of supply are discussed below.

Price of Related Goods: Producers compare the prices of goods that can be produced using the same resources. If another product offers higher profits, they may shift production to that product, reducing the supply of the original product.
Example A farmer may grow chickpeas instead of wheat if chickpeas offer higher returns.

Number of Sellers in the Market: The quantity supplied depends on the number of producers selling a product. More sellers increase market supply, while fewer sellers reduce it.
Example When more firms start producing bottled water, its market supply increases.

Technology: Better technology improves production efficiency, reduces production costs, and increases the quantity supplied.
Example Drip irrigation helps farmers produce more crops, increasing supply.

Future Expectations: Producers expectations about future prices or demand affect their current supply decisions. If they expect higher prices in the future, they may reduce current supply by storing the product.
Example A mango wholesaler may store mangoes if higher prices are expected in the coming weeks.

Market Equilibrium

• Market equilibrium is the situation in which the quantity demanded is equal to the quantity supplied. At this point, there is no excess demand (shortage) or excess supply (surplus) in the market and prices tend to remain stable unless affected by external factors.
• In every market, buyers and sellers interact to determine the price of a product. Buyers are willing to pay a certain price, while sellers are willing to sell at a particular price. The interaction between demand and supply determines the market equilibrium.
• The table below shows the quantities of mangoes demanded and supplied at different prices. At lower prices, the quantity demanded is greater than the quantity supplied, resulting in excess demand. At higher prices, the quantity supplied is greater than the quantity demanded, resulting in excess supply.

Relationship between quentity supply and quality demand

At a price of ₹100, the quantity demanded is equal to the quantity supplied. This point is called market equilibrium. At the equilibrium price, the market is in balance, so there is no tendency for the price to rise or fall.
As a result, there is neither a shortage (excess demand) nor a surplus (excess supply) and all goods produced are successfully bought and sold.

The below figure shows that demand curve (DMDM’) intersects the supply curve (SMSM’) at point E, which represents the market equilibrium. At this point, the equilibrium price is ₹ 100 and the equilibrium quantity is 12 kg.

Real-World Deviations
Market equilibrium does not remain constant in real world. Changes in consumer preferences, technology, production costs, government policies, weather, wars, pandemics and natural disasters continuously affect demand and supply. As a result, the equilibrium price and quantity keep changing and markets keep adjusting to a new equilibrium.

Real-Life Example: COVID-19 Pandemic

• During the COVID-19 pandemic, the demand for face masks and sanitizers increased sharply. Supply could not increase immediately, leading to shortages and higher prices.
• As production expanded, supply increased, prices gradually fell and the market moved towards a new
  equilibrium. After the pandemic, demand declined further and prices returned close to their pre-pandemic levels. ,
• This example shows that market equilibrium is not fixed. Changes in demand and supply continuously create a new equilibrium in real-world markets.

Common Situations in Real-World Markets
Some common situations in real-world markets that influence the behaviour of demand and supply are as follows

Necessities: Necessities are goods that are essential for meeting basic needs. Their demand changes very little even when prices increase because consumers continue to purchase them.
Examples: Food, medicines, electricity and drinking water.

Luxury Goods: Luxury goods are non-essential goods that are purchased mainly for comfort, status, or enjoyment. Their demand is influenced more by changes in income, consumer preferences and economic conditions than by price alone.
Examples: Designer watches, premium cars, expensive jewellery and luxury handbags.

Perishable Goods: Perishable goods are goods that spoil or lose their quality if they are not sold or consumed within a short period.
Sellers often reduce their prices to avoid wastage, causing temporary changes in market prices.
Examples: Fruits, vegetables, milk, flowers and fresh fish.

Expectations: Expectations refer to the beliefs or predictions of consumers and producers about future market conditions, especially future prices. These expectations influence their current buying and selling decisions and may temporarily shift demand or supply.
Examples: Consumers may buy more petrol if they expect fuel prices to rise, while producers may hold back the stock of onions if they expect higher prices in the future.

Dynamic Markets in the Real World
Market equilibrium is not a fixed point in the real world. Prices keep changing as demand and supply change. The following example illustrates how businesses adjust prices according to changing market conditions.

Dynamic Hotel Tariffs
Hotels do not charge the same tariff (room price) at all times. Room tariffs change according to demand, season and special events, showing that markets are dynamic and prices continuously adjust to changing conditions.

For example, a hotel in Goa may charge

• ₹ 1,500 per night on an off-season weekday.
• ₹ 8,000 per night on a weekend during the tourist season.
• ₹ 25,000 per night on New Year’s Eve when demand is very high.

If a group tour cancels its booking, the hotel may reduce the tariff by 40% to fill empty rooms. Hotels may also change tariffs several times a day to maximise revenue.

Tariff changes depend on factors, such as

• Speed of room bookings
• Tariffs charged by nearby hotels
• Festivals, conferences and local events
• Weather conditions
• Number of days left before arrival
• Past booking trends

This example shows that market prices keep changing as demand and supply change in real-world markets.

Market Failure
A market failure occurs when the free market fails to allocate resources efficiently, resulting in outcomes that are not beneficial for society.
In such situations, the government may intervene to improve economic efficiency and social welfare.

Types of Market Failure
Provision of Public Goods Provision of public goods refers to the government’s responsibility to provide goods and services meant for the use and benefit of the entire society. Since private firms cannot easily earn profits from these goods, they may not provide them adequately, leading to market failure.

Public goods have the following characteristics

• Non-excludable Non-excludable means that it is difficult or impossible to prevent people from using a public good, even if they have not paid for it.For example, anyone can use a public park or benefit from street lighting without being excluded.
• Non-rival Non-rival means that one person’s use of a public good does not reduce its availability or benefits for others. For example, one person using a public park or benefiting from street lighting does not reduce its use or benefits for others.

Real-life-Example of Public Good: Public Park
Suppose a neighbourhood needs a public park. Building the park is expensive, but many families would benefit from it. If each family contributed ₹ 5,000, the park could be built. However, some families may think that if others pay, they can still use the park without contributing. As a result, not enough money is collected and the park is never built even though everyone needs it.
This example shows that some goods benefit everyone but may not be provided by the market alone. Therefore, the government often provides or finance public goods to promote social welfare, economic development and eqpal access to essential services.

• Externalities Externalities are the effects of the actions of individuals or businesses on others that are not reflected in market prices. This may lead to overproduction or underproduction of goods, causing market failure.
• Monopoly and Market Power Monopoly and market power occur when a single firm or a few firms control the market. They may charge high prices, restrict supply, or reduce quality, leading to market failure.
• Information Asymmetry (Information Failure) Information asymmetry occurs when one party has more or better information than the other in a transaction. This can result in unfair decisions and inefficient market outcomes, causing market failure.

Role of Government in the Economy
India is the fourth-largest economy in the world and follows a market-based, regulated economy where prices are mainly determined by demand and supply. In such an economy, the government plays an important role as follows

• The government ensures that the market functions fairly and protects the interests of consumers and producers.
• It intervenes when markets fail to ensure fairness and equity, especially for vulnerable and low-income groups.
• The government regulates the prices of essential goods and services, whenever necessary, to keep them affordable.

Example: If the price of essential medicines rises sharply, the government may fix a maximum price to make them accessible to everyone.

Government Measures to Prevent Unfair Practices
The following are the key measures taken by the government to regulate unfair trade practices

• Imposes a Price Ceiling: The government fixes a maximum price for essential goods such as medicines, food items and fuel. This prevents sellers from charging excessively high prices and keeps these goods affordable for consumers.
• Prevents Shortages: If a price ceiling leads to a shortage, the government may increase the supply of goods through public distribution, imports, or by encouraging higher production to meet consumer demand.
• Controls Black Marketing and Hoarding: The government takes legal action against traders who illegally sell goods at prices above the government-approved limit or hoard goods to create artificial shortages and earn higher profits.
• Fixes a Price Floor: The government sets a minimum price below which certain goods or services cannot be sold. This protects producers and workers by ensuring they receive a fair minimum price or wage.
• Regulates Monopolies: The government enforces competition laws to prevent a single seller or a few firms from dominating the market, charging unfair prices, restricting supply, or providing poor-quality goods and services.
• Establishes Regulatory Authorities: The government sets up regulatory authorities to ensure transparency, protect consumers and regulate different sectors of the economy. For example, RBI regulates banking, CCPA protects consumer rights, TRAI regulates telecommunications and SEBI regulates the securities market.

Limitations of Government Intervention
Government intervention is necessary to correct market failures and protect public welfare. However, excessive or poorly designed intervention may also create certain problems. Some limitations are as follows
(a) Price Distortions and Reduced Producer Incentives When the government fixes prices below the market price, producers may earn lower profits and lose the motivation to produce more goods or services. For example, if the government fixes the price of wheat at ₹ 20 per kg while the market price is ₹ 30 per kg, farmers receive lower returns. This may reduce production and lead to shortages.

(b) Compliance Burdens Government regulations often require businesses to obtain licences, permits and meet various compliance requirements. These procedures can increase the time and cost of doing business, especially for small enterprises.
For example, a small restaurant may need approvals related to food safety, fire safety, pollution control and local authorities, making it difficult to start or expand the business.

(c) Discourages Innovation and Entrepreneurship Excessive regulation and price controls may reduce the incentive to invest in new ideas, better technology, or business expansion.
For example, if farmery cannot earn adequate returns because of price controls, they may not invest in improved seeds, irrigation facilities, or modern technology, reducing productivity and long-term output.

The Price Puzzle What Drives the Market Class 9 Short Notes

→ Demand: The quantity of a good consumers are willing and able to buy at various prices, ceteris paribus.

→ Externality: Cost or benefit to third parties not involved in a market transaction.

→ Supply: The quantity of a good producers are willing to offer at various prices, ceteris paribus.

→ Public Good: Non-excludable and non-rival good; e.g., street lighting, national defence.

→ Market Equilibrium: Market equilibrium is the point where the quantity demanded equals the quantity supplied, resulting in a stable market price with no shortage or surplus.

→ Information Asymmetry: One party has more information than the other in a transaction.

→ Price Floor: Price floor is the minimum price fixed by the government below which a product, good, or service cannot be sold. It protects producers and workers by ensuring they receive a fair price or wage.

→ Veblen Good: Luxury good where demand increases with price due to status signalling.

→ Monopoly: Monopoly is a market situation in which a single seller or producer controls the supply of a product or service and has the power to influence its price because there are no close substitutes.

→ Ceteris Paribus: Latin for all other things being equal’- the core assumption in demand/supply analysis.

→ Price Ceiling: Maximum legal price set below equilibrium by government, causing shortage.

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