UPSC Prelims 2021 Question:

Consider the following statements:.

Other things remaining unchanged, market demand for a good might increase if 

1. price of its substitute increases 
2. price of its complement increases 
3. the good is an inferior good and income of the consumers increases 
4. its price falls
   
   

Which of the above statements are correct?

Explanation: 

• • Two goods are substitute goods if they can be used in place of one another. For example, tea and coffee. The demand for a good usually moves in the direction of the price of its substitutes. The demand for coffee will increase if there is an increase in the price of a good. So, statement 1 is correct.
    
    

• A complementary good is a product or service that provides value to another product or service. Example: car and petrol. The demand for a good moves in the opposite direction of the price of its complementary goods. The market demand for a car will decline if there is an increase in the petrol prices. So, statement 2 is not correct.
  
  

• An inferior good is a good for which demand declines as the income of the consumer increases. Examples of inferior goods include low-quality food items like coarse cereals. Thus, when the income of the consumer increases, s/he replaces the inferior goods with superior goods. Hence, the demand for inferior goods declines. So, statement 3 is not correct.
  
  
• Law of Demand states that, other things being equal, there is a negative relation between demand for a commodity and its price. When the price of a good falls, its demand increases and when the price of a good rises, its demand falls. So, statement 4 is correct.
  
  

Therefore, option (1) is the correct answer.

Subject: Economics | Micro and Macroeconomics