explain the chain effects of rise in price of related goods on the demand of a commodity

Related goods can be of following two types:

(i) Substitute Goods- Those goods that can be substituted for another goods. For example, tea and coffee

(ii) Complementary Goods- Those goods that complete the demand for another goods. For example, ink and ink-pen

 

Substitute goods

(a) Increase in the Price of Substitute Goods

 

With the rise in the price of coffee, the demand for coffee falls (as it is relatively expensive now), consequently, consumer substitute tea for coffee. This results in the increase in the demand for tea. Thus, a rise in the price of coffee pushes up the demand for tea. That is, 

Price of Coffee Demand for Tea

 

 

(b) Decrease in the price of substitute goods

 

On the other hand, with the fall in the price of coffee, the demand for coffee rises (as it is relatively cheaper now), consequently, consumer substitute coffee for tea. This results in the fall in the demand for tea. Hence, a fall in the price of coffee dampens the demand for tea. That is, 

Price of Coffee Demand for Tea

 

(ii) Complementary goods

 

(a) Increase in the price of complementary goods

 

If price of ink-pen rises, then the consumer demand lesser quantities of ink-pen, as it is comparatively expensive. The rise in ink-pen's prices makes the cost of consumption of ink expensive. As a result, consumer demands lesser quantities of ink. That is, 

Price of Ink-Pen ↑ ⇒Demand for Ink-Pen Demand for Ink (As Ink and Ink-Pen are complementary Goods)

 

 

(b) Decrease in the price of complementary goods

 

On the contrast, with a fall in the ink-pen prices, the consumer raises their demand for ink-pen. This further raises the demand for ink. Finally, we can conclude that a fall in the Ink-Pen's prices has pushed-up the demand for ink. That is, 

Price of Ink-Pen ↓ ⇒Demand for Ink-Pen Demand for Ink

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