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?

1. 1 and 4 only
2. 2, 3 and 4
3. 1, 3 and 4
4. 1, 2 and 3

Explanation

Option (a) is correct

• Let us first understand what substitute goods are: Goods that can be used in place of one another to satisfy a specific want, like tea and coffee, are known as Substitute Goods. The price of substitute goods directly affects the demand for a given commodity. For example, if the price of a substitute good (say, coffee) increases, then demand for the given commodity (say, tea) will increase as compared to coffee (Statement 1 is correct). The goods which are used together to satisfy a specific want, like bread and butter, are known as Complementary Goods.
• The price of a complementary good and demand for the given commodity are inversely related to each other. For example, if the price of a complementary good (say, butter) increases, then demand for the given commodity (say, bread) will decrease as it will become costlier for the consumer to use both goods together (Statement 2 is incorrect). An inferior good is an economic term for a good whose demand decreases as people’s incomes rise.
• These goods fall out of favour as incomes and the economy improve as consumers begin buying more costly substitutes instead. For example: If instant noodles are considered an inferior good, an increase in consumers’ income might lead them to purchase more premium or healthier food options, reducing their demand for instant noodles (Statement 3 is incorrect). And the last statement is true, as we know, the simple rule of demand and supply is that when the price of a good falls, its demand rises.

Answer: (a) 1 and 4 only; Difficulty Level: Medium