The story of Boro Island: the summer of Plenty

Life on Boro Island was very simple. One rupee could buy one Jalebi. 5 rupees could buy a shirt. 10 rupees could buy denim. 100 rupees was enough to do Pandal hopping in Durga Pujja and eating different street foods. People on the island were happy, earned good enough to sustain and spent very wisely. 

One day, the government decided to conduct an experiment. Every one on the island received a cash bonus. The markets were crowded and people started buying things like clothes, sweets, food, gadgets, toys etc. The demand kept on rising.  The shopkeepers were not ready with this sudden demand surge. Their shelves emptied faster than restock. 

The bakery houses had no flour to make new breads, toy makers had long waitlists. Fabrics ran short. Oil prices rose. There was no sugar left for making Jalebis. As a result, the shopkeepers decided to raise the prices of the goods they had left with them. Meanwhile they could increase the supply of goods to match the demand surge. 

As the prices rose, a samosa that cost ₹1 now sold for ₹3. The Jalebi went from ₹1 to  ₹3.  The shirt went ₹5, then ₹10. The festive treat went up to ₹100. Citizens now had to spend more on the same items that they used to buy before. A wise economist Mr. X from the council explained: “Inflation happens when money increases faster than goods. Prices rise, and your rupees buy less.” 

People learned that inflation isn’t just about higher prices—it’s about reduced purchasing power. You feel richer, but you’re not. Real wealth isn’t the number of rupees—it’s what those rupees can buy. The island had learned: too much money chasing the same goods causes inflation.

Eventually, Boro Island balanced production and spending. 

Deflation: The pause in Saffron Island 

Saffron Island once sparked with trade. Every working age person had a job. They earned well enough to sustain themselves. The shops thrived. The production in factories was enough to support the demand of the people. The prices of the goods were stable, bread was ₹5, milk ₹3, and a cheerful kite ₹7.

Then came the slow down, factories could not produce enough due to lack of funds. Companies and corporate houses started cutting cost cutting and mass layoffs from the jobs. People started spending less due to an uncertain future. The demand for the goods came down. People started saving and the market shrank. 

The shopkeepers started lowering the prices of the goods to lure people to buy. Bread dropped to ₹3. Milk to ₹2. The kite went for. Sugar dropped to  ₹4 from  ₹10, biscuits to  ₹7 from  ₹10 and likewise. But buyers still hesitated to buy. Factories closed, stores closed. Workers lost jobs. The economy froze. A wise economist Mr. X explained the situation as deflation. Deflation seems kind. But when spending stops, businesses collapse. Prices fall, but so do opportunities.

Citizens realized that falling prices weren’t always good. Deflation can reduce growth, discourage investment, and deepen unemployment. Saffron Island bounced back by encouraging mindful spending and supporting businesses. Soon, warmth returned—slowly, steadily.

The Mango market, Story of Supply and Demand.

There was a village named Sonapur, there lived a farmer named Ramu. Every summer, Ramu sold delicious mangoes in the village market. His mangoes were sweet and always high on demand. One summer, things changed. Lets find out:

Ramu and Law of Demand

Ramu typically sold his mangoes at ₹150 per Kg. However, one summer, he decided to reduce the price of his mangoes to ₹100 per Kg. As a result, more people crowded around his stall, and he sold more mangoes than ever before.

This is the law of Demand in action. It means when the price falls, the quantity demanded increases. And when the price rises, the opposite happens, if all other factors remain constant.

Note: The Law of Demand was first stated by  Augustin Cournot in 1838. Later, it was  refined and elaborated by Alfred Marshall.

What are the conditions OR assumptions under which the law of demands holds?

• Income remains constant.
• The taste, habit and preference of the  consumer remain the same.
• The prices of other related goods should not change.
•  There should be no substitutes for the commodity in study.
• The demand for the commodity must be continuous.
•  There should not be any change in the quality of the commodity.

When Demand Breaks the Rules or Exceptions to law of Demand

Ramu became very rich by selling his mangoes.Now he is thinking of buying luxury goods for himself. Now, every luxury item that he buys increases his prestige in front of his neighbours. He buys diamonds, vintage cars, etc even when the price rises.

These luxury goods are called Veblen goods, where people buy more as the price rises—because they see higher prices as a sign of prestige.

Similarly, there are Giffen goods, where poor families might buy more of a cheap staple (like coarse flour) when prices rise, because they can no longer afford better alternatives.

What Affects Demand Besides Price?

Ramu was curious about the next season when sales of his mangoes fell, even though prices were the same.  This is because price is not the only factor that affects demand. These are called the Determinants of Demand.

• Tastes and Preferences: New fruit trends in the market can shift demand.
• Weather:  Hotter summers mean more mango sales.
• Income Levels:  A decrease in family income can shift demand. One could prefer buying basic needs like rice and wheat rather than buying fruits.
• Population Size:  More people, more mango lovers.
• Expectations:  If people expect prices to rise, they buy early.
• Taxes/Subsidies:  If mangoes are taxed, demand drops.

Demand Elasticity: The Stretch of Buying Power

Then, one year later, there was record rainfall, and Ramu’s mango yield doubled. Prices of the mango dropped to ₹50, but even then, some people didn’t buy more mangoes. Ramu was surprised with this. 

This is called the elasticity of Demand. It’s about how much people’s demand changes when the price of a product changes. 

Perfectly Elastic Demand

One day, a bigger vendor entered Sonapur and began selling high-quality mangoes at ₹50/kg. Ramu, thought his mangoes were better so he raised his mangoes price at ₹51/kg. But to his surprise, no one bought mangoes from Ramu.  Everyone flocked to the cheaper option. 

“This is called a perfectly elastic demand. Even a ₹1 rise drove demand down to zero. 

Perfectly Inelastic Demand: Zamindar entered the picture

Later, a local zamindar ordered mangoes for a wedding. He ordered 100 kg mangoes for his daughter’s wedding. Ramu raised the price to ₹80/kg, and the zamindar still paid.

This is a perfectly inelastic demand.  No matter the price, the quantity demanded remains the same. When there is no change in the demand for a product due to the change in the price, then the demand is said to be perfectly inelastic.

Ramu’s Mango Experiment: A Lesson in Elasticity

As the next summer arrived in Sonapur, mangoes were in high demand. Ramu increased the price of mangoes by 20%, as he thought, mangoes are seasonal fruits and loved by all, people would buy. 

But the opposite happened, his mangoes sales dropped drastically. Many people started buying cheaper fruits like bananas or guavas instead. Mangoes demand dropped by 40% . Ramu was confused and he asked his friend Raju about this.

Raju explained to him that although mangoes are sweet and juicy , they’re non essential. People can easily switch to other fruits. Thus, mangoes have relatively elastic demand. A small price hike causes a larger fall in demand.

Relatively Inelastic Demand:  Off-Season Mango Craving

During the off-season, Ramu had only a few unripe mangoes. He priced them at ₹100/kg. To his surprise, people still bought 90% of his usual quantity. 

This is relatively inelastic demand. Price has risen significantly, but demand hasn’t dropped as much. Maybe because people really crave mangoes off-season.”

Unitary Elasticity

At ₹50/kg, Ramu sold 100 kg daily. When he lowered the price to ₹45/kg, demand increased to 111 kg. That was exactly a 10% fall in price and 10% rise in quantity. This is unitary elastic demand. The percent change in demand equals the percent change in price. Revenue stays constant.”

Importance of Elasticity in Ramu’s Growing Business

Ramu now used elasticity to make smarter decisions:

• Price Fixation: He knew he could charge more for salt or jaggery (inelastic), but needed to keep mango prices competitive.
• Production Planning: During peak mango season, he stocked more only if he could offer good deals—because demand was sensitive.
• Distribution of Profits: His mango suppliers earned less during high-price periods due to low demand, while salt suppliers saw steady income.
• Trade: Ramu even started trading mango pickles in nearby towns. He found that some towns were less sensitive to mango prices than others, showing elasticity varied by region.
• Public Policy and Tax: At the village meeting, Ramu spoke about why the government taxed cigarettes more—because people still buy them even at high prices due to inelastic demand.
• Nationalisation: When talks of taking over the village well system came up, Ramu explained that essential services (like water supply) had inelastic demand—making them important for public control.