Question

How is the demand for a good affected by a rise in the prices of other goods? Explain.

Answer 1

Any two goods are considered to be related to each other, when the demand for one good changes in response to the change in the price of the other good. The related goods can be classified into following two categories.

Substitute Goods: Substitute goods refer to those goods that can be consumed in place of each other. For example, tea and coffee are substitute goods to each other. For such goods, if the price of one good (substitute good) rises, then it leads the consumer to shift his demand to the other good (good in the question). Thus, a rise in the price of substitute good results in a rise in the demand for the good in question. For example, a rise in the price of coffee results in a rise in the demand for tea.

Complimentary Goods: Complementary goods refer to those goods that are consumed together. For example, tea and sugar are complimentary goods to each other. In case of such goods, if the price of one good (complementary good) increases then a consumer reduces his demand for the other good as well. Thus, a rise in the price of complimentary good results in a fall in demand of the good in question. For example, a rise in the price of sugar results in a fall in the demand for tea.