Prelims 2021

Q. Consider the following statements:

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

1.price of its substitute increases
2.price of its complement increases
3.the good is an inferior good and income of the consumers increases
4.its price falls
Which of the above statements are correct?
a) 1 and 4 only
b) 2, 3 and 4
c) 1, 3 and 4
d) 1, 2 and 3
Correct Answer: a) 1 and 4 only

Question from UPSC Prelims 2021 GS Paper

Explanation : 

Factors Influencing Market Demand for a Good

When considering the market demand for a good, various factors can influence whether demand increases or decreases. Here’s a breakdown of how each factor affects demand:

1. Price of Its Substitute Increases

If the price of a substitute good increases, consumers may shift their demand to the original good, as it becomes relatively more affordable. This is a correct statement, exemplified by consumers opting for tea when the price of coffee rises.

2. Price of Its Complement Increases

An increase in the price of a complementary good typically leads to a decrease in demand for the original good. This is because the combined cost of using both goods is higher. Thus, this statement is incorrect in suggesting an increase in market demand for the original good.

3. The Good is an Inferior Good and Income of Consumers Increases

For an inferior good, demand decreases as consumer income rises, as consumers tend to choose higher-quality alternatives. Consequently, an increase in consumer income would not increase demand for an inferior good, making this statement incorrect.

4. Its Price Falls

According to the law of demand, a decrease in the price of a good, ceteris paribus, leads to an increase in the quantity demanded. This is because the good becomes more accessible to consumers, making this statement correct.

In summary, the factors that correctly indicate an increase in market demand for a good are the rise in the price of its substitute and a fall in its own price. Therefore, statements 1 and 4 are accurate.

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