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Question

# Explain the relationship between the following: (i) Prices of other goods and demand for the given goods (ii) Income of the buyers and demand for a good

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Solution

## (i) Other goods may be (a) substitute goods, or (b) complementary goods. The relation between the demand for a given good and price of other goods is different in case of substitute goods and complementary goods. This is explained with reference to the figure. (a) Substitute Goods: Substitute goods are those goods which can be substituted for each other. When price of a substitute goods increases, demand for a given good (say good X) tends to rise. Demand curve for good X will shift to the right, implying quantity demanded increases from PK to PL even when price of good X continues to be OP as shown in Fig. (i) (a) (b) Complementary Goods: Complementary goods are those goods which complete the demand for each other. When price of a complementary good increases, demand for good X tends to fall. Demand curve for good X will shift to the left, implying quantity demanded decreases from PK to PS even when price of good X continues to be OP as shown in Fig. (i) (b). (ii) The relation between the demand for a good and income of the buyers is different in case of normal goods and inferior goods. This is explained with reference to Fig. (ii) (a) (a) Normal Goods: A normal good is that good whose consumption increases with increase in income of the buyer, so that there is a positive relationship between buyer's income and demand for the good. When income rises, demand for the normal good (say milk) increases and demand curve for the normal good shifts to the right from PK to PT as shown in Fig. (ii) (a). (b) Inferior Goods: An inferior good is that good whose consumption decreases with increase in income of the buyer, so that there is a negative relationship between buyer's income and demand for the good. When income rises, demand for inferior good (say coarse grain) falls and demand curve for the inferior good shifts to the left from PT to PK as shown in Fig. (ii) (b).

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