UPSC Prelims 2021 Q4: Determinants of Demand — Explained
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
- 2, 3 and 4
- 1, 3 and 4
- 1, 2 and 3
Answer: (a) 1 and 4 only
Statement-wise explanation
- 1: correct — A substitute can be used in place of this good, like tea and coffee. If the substitute gets dearer, some buyers switch to this good. So demand for this good rises at every price, and its demand curve shifts to the right.
- 2: incorrect — A complement is used together with this good, like cars and petrol. If the complement gets dearer, using the pair costs more, so people buy less of both. Demand for this good falls, and its demand curve shifts to the left.
- 3: incorrect — An inferior good is one people buy less of as their income rises, because they move to better goods (for example, from coarse grains to finer cereals). So when income rises, demand for an inferior good falls and its demand curve shifts to the left. The statement says demand would increase, which is the reverse.
- 4: correct — By the law of demand, with other things unchanged, a fall in a good's own price raises the quantity people buy. Strictly, NCERT calls this a movement along the same demand curve (a rise in quantity demanded), not a shift in demand. UPSC used 'demand' loosely here and counted the statement as correct.
How to eliminate
Basic economics settles this; no recall of facts is needed. Statement 4 is the law of demand and is almost certainly meant to be correct, so option (d) goes. Statement 3 is wrong by definition: an inferior good is the very good whose demand falls when income rises. That removes options (b), (c) and (d), and only (a) remains. To check, test statement 2 on a real pair: if petrol gets costlier, people do not buy more cars. Remember the two directions: a dearer substitute raises demand, and a dearer complement lowers it.
Know more
Determinants of demand. NCERT's Class XII Introductory Microeconomics says the demand for a good depends on its own price, the prices of related goods, consumer income, and tastes and preferences. Market demand also depends on the number of buyers.
Movement vs shift. A change in the good's own price moves the buyer along the same demand curve. This is a change in quantity demanded: price falls, more is bought. A change in any other factor shifts the whole curve. A rightward shift means more is bought at every price (an increase in demand). A leftward shift means a decrease in demand.
| Change (other things equal) | Effect on demand for good X | Curve |
|---|---|---|
| Price of a substitute rises | Increases | Shifts right |
| Price of a complement rises | Decreases | Shifts left |
| Income rises, X is normal | Increases | Shifts right |
| Income rises, X is inferior | Decreases | Shifts left |
| Tastes move in favour of X | Increases | Shifts right |
| Own price of X falls | Quantity demanded rises | Movement along curve |
Inferior and Giffen goods. Whether a good is inferior depends on income level, not on the good alone. A good can be normal for poor households and inferior for richer ones. A Giffen good is an extreme inferior good: its income effect is so strong that it outweighs the substitution effect, so its demand curve slopes upward. It is a textbook exception to the law of demand.
Exam trap. UPSC often mixes 'demand' with 'quantity demanded', or reverses the substitute and complement directions. For each statement, ask two questions. Is it the good's own price (a movement) or some other factor (a shift)? And which direction does the related good push?
NCERT Concepts to Revise
- Determinants of demand: The question asks which changes in the factors behind demand would raise market demand for a good.
- Substitute goods: Statement 1 depends on how buyers respond when the price of a substitute good changes.
- Complementary goods: Statement 2 depends on how goods used together affect each other's demand when one gets dearer.
- Law of demand: Statement 4 is about the link between a good's own price and the quantity bought, other things staying the same.
- Giffen good: Giffen goods are a special inferior good. They help you judge how income changes affect inferior goods in statement 3.