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 statements given above is/are correct?
Explanation
Statement 1 is Correct: Substitutes are goods that can be used in place of each other. When the price of a substitute (e.g., tea) increases, the good in question (e.g., coffee) becomes relatively cheaper, leading consumers to switch to it and increasing its market demand.
Statement 2 is Incorrect: Complementary goods are consumed together (e.g., cars and petrol). According to standard economic principles (NCERT Class 12 Microeconomics), an increase in the price of a complement leads to a decrease in the demand for the good, as the total cost of using the two together rises.
Statement 3 is Incorrect: For an inferior good, there is an inverse relationship between income and demand. As the income of consumers increases, they tend to switch to superior or normal goods, causing the demand for the inferior good to decrease.
Statement 4 is Correct: According to the Law of Demand, other things remaining equal (ceteris paribus), a fall in the price of a good leads to an increase in the quantity demanded by consumers.