question_answer

Explain how do the following influence demand for a good:

(i) Rise in income of the consumer.

(ii) Fall in prices of the related goods.

Answer:

(i) Rise in the income of the consumer: In case of normal goods, a rise in the income of the consumer will increase the demand for the good. This increases leads to the outward parallel shift of the demand curve. However, in case of inferior goods, a rise in the income of the consumer will decrease the demand for the good. This decrease leads to the inward parallel shift of the demand curve.

(ii) Fall in prices of the related goods: Let us suppose that there are two goods X and Y that are perfect substitutes of each other. A fall in the price of say Good Z will lead to fall in the demand for the Good Y and vice-versa. On the other hand, if X and Fare complementary goods, then a fall in the price of Good X will increase the demand for Good Y and vice-versa.