Question

Explain the relationship between

(i) Prices of other goods and demand for the given good.

(ii) Income of the buyers and demand for a good. 

Answer 1

(i) Price of Other Goods and Demand for the given Good

Quantity demanded of a good depends on the price of other goods (i.e. related goods). Any two goods are considered to be related to each other, when the demand for one good changes in response to the change in the price of the other good. The related goods can be classified into following two categories.

1. Substitute Goods

Substitute goods refer to those goods that can be consumed in place of each other. In other words, they can be substituted for each other. For example, tea and coffee, Colgate and Pepsodent, Cello pens and Reynolds pen, etc. In case of substitute goods, if the price of one good increase, the consumer shifts his demand to the other (substitute) good i.e. rise in the price of one good result in a rise in the demand of the other good and vice-versa.

For example, if price of tea increases, then the demand for tea will decrease. As a result, consumers will shift their consumption towards coffee and the demand for coffee will increase. (Price of Tea ↑ ⇒ Demand for Coffee ↑). It should be noted that the demand for a good moves in the same direction as that of the price of its substitute.

If PT increases ⇒ DT decreases ⇒ DC increases ⇒ Tea and coffee are substitute goods

2. Complementary goods

Complementary goods refer to those goods that are consumed together. The joint consumption of these goods satisfies wants of the consumer. For example: Tea and sugar, ink pen and ink, printer and paper, etc.

In case of complementary goods, if the price of one good increases then a consumer reduces his demand for the complementary good as well, i.e. a rise in the price of one good results in a fall in demand of the other good and vice-versa.

For example, sugar and tea are complementary goods. Since, sugar and tea consumed together, so a rise in price of tea reduces the demand for sugar and vice-versa. It should be noted that demand for a good moves in the opposite direction of the price of its complementary goods. (Price of tea ↑ ⇒ demand for sugar ↓)

If P_Tea increases ↑ ⇒ D_Tea decreases ⇒ ↓ D_Sugar increases ↑ ⇒ Tea and Sugar are complementary goods

(ii)  Income of the Buyer and the Demand for a Good.

Change in the income of the buyer also affects the demand for goods. The effect of change in income on the demand depends on the type of the good.

Demand for normal goods share a positive relationship with buyer's income. As income increases, the demand for normal goods also increases and vice-versa.

Demand for inferior goods (such as coarse cereals) shares a negative relationship with consumer's income. As the income increases, the demand for inferior goods falls and vice-versa.

Giffen goods are those goods which are highly inferior. Similar to the inferior goods, demand for Giffen goods also shares a negative relationship with the income.