Explain the effect of rise in price of related goods on the demand for good x.use diagram.

Rise in Price of Related Goods: 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. In case of substitute goods, if the price of one good increases, the consumer shifts his demand to the other (substitute) good i.e. rise in the price of one good results in a rise in the demand of the other good. In this case, the demand curve shifts parallely outwards to the right. 

In the above diagram, as a result of rise in price of coffee, the demand for tea increases and the demand curve for tea shifts from D1D1 to D2 D2.

  • Complementary Goods- Complementary goods refer to those goods that are consumed together. The joint consumption of these goods satisfies wants of the consumer. For example: ink and ink pens. In case of complementary goods, if the price of one good increases then a consumer reduces his demand for the complementary good as well, i.e. a rise in the price of one good results in a fall in demand of the other good. In this case, the demand curve shifts parallely inwards to the left.

In the above diagram, as a result of rise in price of ink pens, the demand for ink falls and the demand curve for ink shifts from D1D1 to D2 D2.

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