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Explain the change in demand of a good on account of change in prices of related goods.

Answer:

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 increases, the consumer shirts 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 \[\uparrow \Rightarrow \] Demand for Coffee\[\uparrow \]). It should be noted the demand for a good moves in the same direction as that of the price of its substitute. If PT increases DT decreases \[\Rightarrow \] DC increases \[\Rightarrow \] 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 is consumed together, so a rise in price of tea reduces the demand of 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\[\downarrow \]) If P Tea increases \[\uparrow \Rightarrow \] D Tea decreases \[\Rightarrow \downarrow \] D Sugar decreases \[\uparrow \Rightarrow \]Tea and Sugar are complementary goods.