gs1medium

Other things remaining unchanged, market demand for a good might increase if

  1. 1.price of its substitute increases
  2. 2.price of its complement increases
  3. 3.the good is an inferior good and income of the consumers increases
  4. 4.its price falls

Which of the above statements are correct?

  1. A.1 and 4 only
  2. B.2, 3 and 4
  3. C.1, 3 and 4
  4. D.1, 2 and 3
▶ Answer & Explanation

Correct answer: A. 1 and 4 only

An increase in the price of a substitute good will lead consumers to switch to the relatively cheaper original good, thus increasing its demand. If the price of a complement good rises, it becomes more expensive to use the original good, leading to a decrease in demand for the original good. For an inferior good, demand decreases as consumer income rises; conversely, if income falls, demand for an inferior good increases. A fall in the price of a good, ceteris paribus, leads to an increase in the quantity demanded, which is reflected as an upward movement along the demand curve; however, market demand (reflecting all consumers) would increase if the price falls enough to attract new buyers or increase purchasing power for existing buyers leading to a higher quantity demanded overall. The question asks about an increase in *market demand*, which is represented by a rightward shift of the demand curve. Statement 1 describes a situation where demand shifts right. Statement 2 describes a situation where demand shifts left. Statement 3 is incorrect as demand for an inferior good increases with a *fall* in income, not an increase. Statement 4 describes a movement along the demand curve (increase in quantity demanded) or a potential shift if the price fall is significant across the market, but generally, a price fall leads to increased quantity demanded. Considering the options and the common interpretation in economics, an increase in price of a substitute (1) directly shifts demand outwards. A fall in the price of the good itself (4) increases quantity demanded, and can be interpreted as an increase in market demand if new buyers are drawn in or existing ones increase their purchase significantly. Thus, 1 and 4 are the most direct reasons for an increase in market demand.

Source: UPSC gs1 2021

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