Consider the following statements:
Other things remaining unchanged, market demand for a good might increase if:
1.The price of its substitute increases.
2.The price of its complement increases.
3.The good is an inferior good, and the income of the consumers increases.
4. Its price falls.
Which of the above statements are correct?
Law of Demand: The Law of Demand states that, all other things being equal, there is a negative relationship between the demand for a commodity and its price. In other words, when the price of the commodity increases, the demand for it falls, and when the price of the commodity decreases, the demand for it rises, assuming that all other factors remain constant. Hence, statement 4 is correct. Income and Types of Goods: As consumer income increases, the demand for an inferior good falls, and as income decreases, the demand for an inferior good rises. Examples of inferior goods include low-quality food items like coarse cereals. Hence, statement 3 is not correct. Substitutes and Complements: Goods that are consumed together are called complementary goods. With an increase in the price of a complement, demand reduces. Hence, statement 2 is not correct. In contrast to complements, goods like tea and coffee are not consumed together. In fact, they are substitutes for each other. The demand for a good usually moves in the direction of the price of its substitutes. Hence, statement 1 is correct.