Consider the pair of goods X or Y. It is observed that when price of Y falls, the demand for X also falls. Which one of the following options would you choose regarding the nature of these goods ?
They are substitute goods
The relationship between two goods is read from the cross effect: how the demand for one good responds to a change in the price of the other. The cross elasticity of demand is positive for substitutes and negative for complements.
When the price of Y falls, Y becomes cheaper relative to X, so consumers switch from X towards Y and the demand for X falls. Price of Y and demand for X move in the same direction, which gives a positive cross elasticity, the defining mark of goods that can replace each other, such as tea and coffee.
For complementary goods a fall in the price of Y would raise the demand for X, because the two are used together. Inferior and Giffen goods are classified by how the demand for a good responds to the consumer's income or to its own price, not to the price of another good, so neither describes this cross relationship.
They are substitute goods option is correct.
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