Question 4
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?
AOptions
BSolution
The question asks what factors might increase the market demand for a good, assuming 'other things remaining unchanged' (ceteris paribus).
Statement 1: If the price of its substitute increases, consumers will find the substitute relatively more expensive and shift their preference towards the good in question, thereby increasing its demand. This statement is correct.
Statement 2: If the price of its complement increases, the complementary good becomes more expensive. Since the good in question is typically consumed together with its complement, the demand for the complement will fall, and consequently, the demand for the good in question will also fall. This statement is incorrect.
Statement 3: If the good is an inferior good and the income of the consumers increases, the demand for that inferior good will decrease. Consumers, with higher incomes, tend to shift from inferior goods to superior (normal) goods. This statement is incorrect.
Statement 4: According to the law of demand, if the price of a good falls, its quantity demanded will increase, assuming all other factors affecting demand remain constant. This statement is correct.
Therefore, statements 1 and 4 are correct.
CStrategy
Apply the basic principles of demand from microeconomics. Clearly understand the relationships between a good's demand and the prices of substitutes and complements, income levels (for normal vs. inferior goods), and its own price (Law of Demand). Always assume 'ceteris paribus' unless stated otherwise.
DSyllabus Analysis
This question is from the Indian Economy section, specifically microeconomics, covering the fundamental concepts of demand, substitutes, complements, and types of goods.
EQuestion Analysis
Easy. This is a direct application of basic economic principles related to the determinants of demand.