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?
1 and 4 only
Understanding Factors Affecting Market Demand
The question asks about the conditions under which the market demand for a good might increase, assuming all other relevant factors remain unchanged (ceteris paribus). Understanding the concept of market demand and the factors that cause it to shift is crucial here. Market demand represents the total quantity of a good or service that consumers are willing and able to purchase at various prices in a given period.
Analyzing Each Statement on Market Demand
Let's examine each statement to determine its effect on the market demand for a good:
-
price of its substitute increases: A substitute good is one that can be used in place of another good. If the price of a substitute good increases, consumers will find the original good relatively cheaper. As a result, consumers are likely to switch from the now more expensive substitute to the original good. This leads to an increase in the demand for the original good at every price level, causing the demand curve to shift to the right.
This statement suggests an increase in market demand.
-
price of its complement increases: A complementary good is one that is typically consumed along with another good (e.g., cars and gasoline). If the price of a complementary good increases, the total cost of consuming the pair of goods increases. This makes the consumption of both goods less attractive. Consumers are likely to reduce their consumption of the complementary good and, consequently, the original good as well. This leads to a decrease in the demand for the original good at every price level, causing the demand curve to shift to the left.
This statement suggests a decrease in market demand.
-
the good is an inferior good and income of the consumers increases: An inferior good is a type of good for which demand decreases as consumer income increases. If a good is inferior and the income of consumers rises, consumers will tend to buy less of this good, choosing to buy more of normal goods instead. This leads to a decrease in the demand for the inferior good at every price level, causing the demand curve to shift to the left.
This statement suggests a decrease in market demand.
-
its price falls: A change in the price of the good itself causes a movement along the demand curve, not a shift of the demand curve. When the price of a good falls, the quantity demanded increases, according to the law of demand. While this leads to more of the good being purchased, economists typically refer to this as an "increase in quantity demanded" rather than an "increase in demand". However, in some contexts, especially in introductory economics, "increase in demand" can sometimes be used more broadly to mean an increase in the amount purchased, which includes the effect of a price fall. Given the options, it is likely that this statement is intended to be interpreted as a factor leading to a greater amount demanded in the market.
This statement leads to an increase in the quantity demanded.
Evaluating the Statements for Market Demand Increase
Based on our analysis:
- Statement 1 (price of substitute increases) causes the demand curve to shift right (increase in demand).
- Statement 2 (price of complement increases) causes the demand curve to shift left (decrease in demand).
- Statement 3 (inferior good, income increases) causes the demand curve to shift left (decrease in demand).
- Statement 4 (its price falls) causes a movement along the demand curve resulting in higher quantity demanded.
Statements 1 is clearly a factor that increases market demand (shifts the curve). Statement 4 describes a situation where more is demanded due to a lower price. If the question interprets "market demand increases" loosely to include an increase in quantity demanded due to a price fall, then both 1 and 4 would be considered correct factors leading to more of the good being bought in the market.
Considering the common interpretations and the likely intent of the question in an exam setting, statements 1 and 4 are the most likely candidates for conditions under which more of the good is demanded in the market.
Therefore, statements 1 and 4 are correct according to this interpretation.
| Statement | Factor | Effect on Demand/Quantity Demanded |
|---|---|---|
| 1 | Price of substitute increases | Increase in Market Demand (shift right) |
| 2 | Price of complement increases | Decrease in Market Demand (shift left) |
| 3 | Inferior good, income increases | Decrease in Market Demand (shift left) |
| 4 | Price falls | Increase in Quantity Demanded (movement along curve) |
Conclusion on Correct Statements
Based on the analysis, statements 1 and 4 describe scenarios that would lead to an increase in the amount of the good demanded in the market, either through a shift in the demand curve (statement 1) or a movement along the demand curve (statement 4). Therefore, statements 1 and 4 are correct.
Revision Table: Key Concepts in Demand
| Concept | Definition/Effect | Example Factor Causing Change |
|---|---|---|
| Market Demand | Total quantity consumers buy at various prices. | Sum of individual demands. |
| Change in Quantity Demanded | Movement along the demand curve due to price change. | Price of the good itself falls or rises. |
| Change in Demand | Shift of the entire demand curve due to non-price factors. | Income, tastes, price of related goods, expectations, number of buyers. |
| Substitute Goods | Goods used in place of each other. | Tea and Coffee. Increase in price of one increases demand for the other. |
| Complementary Goods | Goods used together. | Cars and Petrol. Increase in price of one decreases demand for the other. |
| Inferior Good | Demand decreases as income increases. | Some public transport options vs. owning a car. |
Additional Information on Demand Shifters
Factors other than the good's own price that can cause the market demand curve to shift include:
- Income of consumers: For normal goods, demand increases as income increases. For inferior goods, demand decreases as income increases.
- Tastes and preferences: Changes in consumer preferences can increase or decrease demand.
- Prices of related goods: This includes substitutes and complements, as discussed above.
- Consumer expectations: Expectations about future prices or income can affect current demand. For example, expecting a price increase might lead to higher current demand.
- Number of buyers: An increase in the number of consumers in the market will increase overall market demand.
It is important to distinguish between a movement along the demand curve (caused by a change in the good's own price) and a shift of the demand curve (caused by changes in other factors, often called demand shifters).
Important Questions from Money and Banking
Which one of the following is likely to be the most inflationary in its effects?
Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?
Consider the following statements :
The effect of devaluation of a currency is that it necessarily
1. improves the competitiveness of the domestic exports in the foreign markets
2. increase the foreign value of domestic currency
3. improves the trade balance
Which of the above statements is/are correct?
Indian Government Bond Yields are influenced by which of the following?
1. Actions of the United States Federal Reserve
2. Actions of the Reserve Bank of India
3. Inflation and short-term interest rates
Select the correct answer using the code given below.
With reference to “Urban Cooperative Banks" in India, consider the following statements :
1. They are supervised and regulated by local boards set up by the State Governments.
2. They can issue equity shares and preference shares.
3. They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966
Which of the statements given above is/are correct?
