question_answer

How is the demand for a good affected by a rise in the prices of other goods? Explain.

Answer:

Price of other goods and demand for the given good: 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.

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 \[\uparrow \Rightarrow \]Demand for Coffee\[\uparrow \]). It should be noted that the demand for a good moves in the same direction as that of the price of its substitute.

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.

For example, sugar and tea are complementary goods. Since, sugar and tea are 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 \[\uparrow \Rightarrow \]demand for sugar\[\downarrow \])