Suppose there are only two normal goods in the economy, X and Y. If price of good X increases, which would be the correct statement from below ?
Demand for good X decreases and demand for Y is indeterminate.
Demand for good X decreases and demand for Y decreases.
Demand for good X increases and demand for Y is indeterminate.
Demand for good X increases and demand for Y decreases.
Answer is Right!
Answer is Wrong!
This question was previously asked in
UPSC CDS-2 – 2024
To determine the effect on the demand for good Y, we need to consider the cross-price elasticity of demand, which depends on whether X and Y are substitutes, complements, or unrelated goods.
– If X and Y are substitutes (e.g., tea and coffee), an increase in the price of X makes Y relatively cheaper or more attractive. This leads to an increase in the demand for Y (a rightward shift of the demand curve for Y).
– If X and Y are complements (e.g., cars and petrol), an increase in the price of X reduces the quantity demanded of X. Since X and Y are consumed together, the reduced consumption of X also leads to a decrease in the demand for Y (a leftward shift of the demand curve for Y).
– If X and Y are unrelated goods, a change in the price of X has no significant impact on the demand for Y.
The information that X and Y are “normal goods” relates to how their demand changes with income, not how their demand changes with respect to the price of *another* good. Therefore, based only on the information that X and Y are normal goods and the price of X increased, we know the demand for X decreases, but the effect on the demand for Y is indeterminate without knowing the relationship between X and Y (substitutes, complements, or unrelated).