Question

How does the change in the price of related goods affect the demand of a commodity? Explain.

Discuss how prices of related goods affect the demand for a commodity.

Answer 1

The prices of related items, which can be generally categorized into substitute and complementary commodities, influence the demand for a commodity.

1. Substitute Goods:
   • These are interchangeable goods.
   • Impact: When the price of a substitute rises, people migrate to the less expensive option, increasing demand for the original commodity.
   • Example: If the price of tea increases, the demand for coffee may rise.
2. Complementary Goods:
   • These are goods that are used together.
   • Impact: When the price of a complementary good rises, demand for the original commodity falls as the total cost of consuming both increases.
   • Example: If the price of petrol rises, the demand for cars may fall.