Question

Explain the effect of change in prices of the related goods on demand for the given good.

Answer 1

The related goods can he classified into following two categories.

i) Substitute Goods- Substitute goods refer to those goods that can he consumed in place of each other. For example, tea and coffee. In case of substitute goods rise in the price of one good increases, the consumer shifts his demand to the other (substitute) good i.e. rise in the price of one good results in the rise in the demand of the other good. In this case, the demand curve shifts parallel outwards to the right.
In the above diagram, as a result of rise in price of coffee, the demand for tea increases and the demand curve for tea shifts from $D_1,D_1$ to $D_2{D}_2$.(Ref. Image 1)
In case, there is a fall in the price of the substitute goods, then the demand for the other good will also fall. And in this case, the demand curve for the other good (tea) will shift towards the left.
In the above diagram, as a result of fall in price of coffee, the demand for tea falls and the demand curve for tea shifts from $D_1{D}_1$ to $D_2{D}_2$.(Ref. Image 2)

ii) Complementary Goods: Complementary goods refer to those goods that are consumed together. The joint consumption of these goods is done to satisfy the wants of the consumer. For example. ink and ink pens. 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 this case, the demand curve shifts parallel inwards to the left.
In the above diagram, as a result of rise in price of ink pens, the demand for ink falls and the demand curve for ink shifts from $D_1{D}_1$ to $D_2{D}_2$.(Ref. Image 3)
In case, there is a fall in the price of the complementary good, then the demand for the other good will rise. And in this case, the demand curve for the other good (ink) will shift parallel towards right.
In the above diagram, as a result of a decrease in price of ink pens, the demand for ink rises and the demand curve for ink shifts from $D_1{D}_2$ to $D_2{D}_2$.(Ref. Image 4)