Economics Notes for UGC NET
Topics: National Income | Demand | Supply
1. National Income
National income is the total value of goods and services produced by a country's economy over a
period of time, usually one year. It measures the economic performance and standard of living of
a nation.
1.1 Key Concepts
● GDP (Gross Domestic Product): Total value of final goods and services produced within the
domestic territory of a country during a given period.
● GNP (Gross National Product): GDP + Net Factor Income from Abroad (NFIA). Measures
output produced by a country's nationals, whether within or outside the country.
● NNP (Net National Product): GNP − Depreciation (consumption of fixed capital).
● NDP (Net Domestic Product): GDP − Depreciation.
● Personal Income: Total income received by individuals/households from all sources before
payment of personal taxes.
● Disposable Income: Personal Income − Direct Taxes; income actually available for
consumption and saving.
1.2 Methods of Measuring National Income
● Product / Value Added Method: Sums the value added at each stage of production across
all sectors, avoiding double counting.
● Income Method: Sums all factor incomes — rent, wages, interest, and profit — earned by
factors of production.
● Expenditure Method: GDP = C + I + G + (X − M), where C = private consumption, I =
investment, G = government expenditure, X = exports, M = imports.
1.3 Price Concepts
● Nominal vs Real Income: Nominal income is measured at current prices; real income is
adjusted for inflation using a base year price level.
● GDP Deflator: Ratio of Nominal GDP to Real GDP, multiplied by 100; reflects overall price
level changes in the economy.
● Factor Cost vs Market Price: Market Price = Factor Cost + Indirect Taxes − Subsidies.
● Basic Prices: Price received by producer excluding taxes on products but including subsidies
on products.
1.4 Circular Flow of Income
The circular flow model illustrates the continuous movement of goods, services, and money
between households, firms, government, and the foreign sector.
● Two-sector model: Flow of income/expenditure between households and firms only.
● Three-sector model: Adds the government sector, introducing taxes and government
spending.
● Four-sector model: Adds the foreign sector, introducing exports and imports.
● Leakages (withdrawals): Savings, taxes, and imports remove money from the circular flow.
● Injections: Investment, government spending, and exports add money into the circular flow.
2. Demand
Demand refers to the quantity of a good or service that a consumer is willing and able to purchase
at a given price during a given period of time.
2.1 Law of Demand
There is an inverse relationship between the price of a good and the quantity demanded,
assuming all other factors (ceteris paribus) remain constant. As price falls, quantity demanded
rises, and vice versa.
2.2 Determinants of Demand
● Price of the good itself
● Income of the consumer
● Prices of related goods — substitutes and complements
● Tastes and preferences of consumers
● Expectations regarding future prices/income
● Size and composition of population
2.3 Elasticity of Demand
● Price Elasticity (Ed): Ed = (% change in quantity demanded) / (% change in price). Measures
responsiveness of demand to price changes.
● Income Elasticity: Measures responsiveness of demand to changes in consumer income.
● Cross Elasticity: Measures responsiveness of demand for one good to a price change in
another good.
● Types: Perfectly elastic, elastic, unitary elastic, inelastic, and perfectly inelastic demand.
2.4 Exceptions to the Law of Demand
● Giffen Goods: Goods for which demand rises as price rises, typically inferior necessities
consumed by the poor.
● Veblen Goods: Prestige or status goods where higher price increases desirability (snob
effect).
● Necessities: Demand for essential goods remains relatively unchanged regardless of price.
● Expectations of future price changes: Consumers may buy more now even at higher prices
if they expect prices to rise further.
2.5 Theories of Consumer Behaviour
● Cardinal Utility Approach (Marshall): Assumes utility is measurable in numerical units;
based on the Law of Diminishing Marginal Utility.
● Ordinal Approach — Indifference Curve Analysis (Hicks): Consumers rank bundles of
goods by preference rather than assigning numerical utility values.
● Revealed Preference Theory (Samuelson): Consumer preferences are inferred from actual
observed purchasing behaviour.
3. Supply
Supply refers to the quantity of a good or service that a producer is willing and able to sell at a
given price during a given period of time.
3.1 Law of Supply
There is a direct (positive) relationship between the price of a good and the quantity supplied,
assuming other factors remain constant. As price rises, quantity supplied rises, and vice versa.
3.2 Determinants of Supply
● Price of the good itself
● Cost of production (inputs, wages, raw materials)
● Level of technology
● Prices of related goods
● Producer expectations about future prices
● Government policy — taxes and subsidies
● Number of sellers/firms in the market
3.3 Elasticity of Supply
Es = (% change in quantity supplied) / (% change in price). It is influenced by the time period
under consideration, the nature of the production process, and the availability of inputs.
3.4 Market Equilibrium
Market equilibrium occurs at the price and quantity where the demand curve intersects the supply
curve. At this point, the quantity demanded equals the quantity supplied. Shifts in either the
demand or supply curve — due to changes in their respective determinants — lead to a new
equilibrium price and quantity.
3.5 Producer Behaviour
● Cost Concepts: Fixed cost, variable cost, total cost, average cost, and marginal cost.
● Production Function: Relationship between inputs (land, labour, capital) and output
produced.
● Returns to Scale: Increasing, constant, or decreasing returns as all inputs are scaled
proportionally.
● Law of Variable Proportions: As more units of a variable input are added to a fixed input,
marginal product initially increases, then decreases (diminishing returns).