Consider the following statements:
Other things remaining unchanged, market demand for a good might increase if
- price of its substitute increases
- price of its complement increases
- the good is an inferior good and income of the consumers increases
- its price falls
Which of the above statements are correct?
1 and 4 only
2, 3 and 4
1, 3 and 4
1, 2 and 3
Answer is Right!
Answer is Wrong!
This question was previously asked in
UPSC IAS – 2021
– 2. Price of its complement increases: If the price of a complementary good (e.g., cars vs. petrol) increases, the total cost of consuming the bundle increases. This typically leads to a decrease in demand for both the complement and the original good (cars). This causes a leftward shift in the demand curve. Statement 2 is incorrect.
– 3. The good is an inferior good and income of the consumers increases: For an inferior good (e.g., cheap noodles), as consumer income increases, demand for that good decreases (consumers switch to normal goods). This causes a leftward shift in the demand curve. Statement 3 is incorrect.
– 4. Its price falls: According to the law of demand, if the price of a good falls, the quantity demanded increases. While this is technically a movement *along* the demand curve (not a shift of the curve which is typically meant by “increase in market demand”), in the context of competitive multiple-choice questions, “market demand… increase” is sometimes used more broadly to include factors that lead to more of the good being bought, which includes a price reduction. Given the options, this interpretation is likely intended. Statement 4 leads to an increase in the quantity demanded.