Consider the following statements:
Other things remaining unchanged, market demand for a good might increase if
- Price of its substitute increase
- Price of its complement increase
- The good is an inferior good and income of the consumers increases
- Its price falls
Which of the above statements are correct?
[UPSC Civil Services Exam – 2021 Prelims]
(a) 1 and 4 only
(b) 2, 3 and 4 only
(c) 1, 3 and 4 only
(d) 1, 2 and 3 only
- Statement 1 is correct because the demand for a particular commodity tends to increase when the price of a substitute good rises, making the first commodity relatively cheaper in comparison.
- Statement 2 is incorrect because a complementary good or service is an item used alongside another good or service, and when the price of a complementary good decreases, it does not necessarily lead to an increase in demand for both goods. In the given example, an increase in demand for cars does not necessarily mean there will be an increase in demand for fuel when the price of fuel decreases.
- Statement 3 is incorrect because an inferior good refers to an item that becomes less desirable as the incomes of consumers increase, not necessarily having a negative price elasticity. As consumers’ incomes rise, they tend to decrease their purchases of inferior goods in favor of normal goods or luxury goods.
- Statement 4 is correct because when the price of a good decreases, the quantity demanded tends to increase. This is because the lower price increases the real incomes of buyers, enabling them to afford and purchase more of the good.