Question 61 from UPSC CSE 2021 - Economics

Question

Consider the following statements:
1. Other things remaining unchanged, market demand for a good might increase if the price of its substitute increases.
2. Other things remaining unchanged, market demand for a good might increase if the price of its complement increases.
3. Other things remaining unchanged, market demand for a good might increase if the good is an inferior good and income of the consumers increases.
4. Other things remaining unchanged, market demand for a good might increase if its price falls.
Which of the above statements are correct?

IASCODEX · Accepted Answer

Correct Option: A. 1 and 4 only

Strategy: - Identify the economic concept in each statement (substitute, complement, inferior good, law of demand).
- Apply the corresponding demand relationship to determine if the statement's outcome is correct.
- Select the statements that accurately reflect these economic principles.

Key Info: **Substitute Goods**
Products that can be used in place of each other, such as tea and coffee. When the price of a substitute increases, consumers shift their demand to the alternative, increasing its demand.

**Complementary Goods**
Goods that are consumed together, like bread and butter. An increase in the price of a complement reduces the demand for the related good because their joint consumption declines.

**Inferior Goods**
Goods whose demand decreases as consumer income rises. Examples include low-grade food items and basic public transport, as consumers opt for better alternatives with more income.

**Law of Demand**
This principle states that, all else being equal, a decrease in a good's price leads to an increase in its demand. This illustrates the inverse relationship between price and quantity demanded.

**Summary of Relationships**
- Higher substitute price → demand rises.
- Higher complement price → demand falls.
- Higher income for an inferior good → demand falls.
- Lower price for a good → demand rises.

These concepts are foundational in microeconomic theory.

IASCODEX · Answer

Option B: 2, 3, and 4

IASCODEX · Answer

Option C: 1, 3, and 4

IASCODEX · Answer

Option D: 1, 2, and 3