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Related Goods & Kinds of Demand

Substitute and complementary goods, normal/inferior/necessity goods, and the 9 kinds of demand.

Notes

Related Goods & Kinds of Demand

Class 11 Micro Economics — Substitute and complementary goods, income effects, and types of demand

Substitute and Complementary Goods

Not all goods exist in isolation. Some goods compete, some complement each other. Understanding these relationships helps predict how demand shifts when prices of related goods change.

Good X

Tea

Good Y

Coffee
Substitute Goods

Tea and Coffee can replace each other. If the price of Coffee rises, consumers switch to Tea → demand for Tea increases.

⭐ Positive Cross Price Effect

Effect on Demand for Tea when Price of Coffee changes

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Substitutes: Price of good X ↑ → demand for substitute Y ↑ (positive cross price effect).

Complements: Price of good X ↑ → demand for complement Y ↓ (negative cross price effect).

Normal, Inferior and Necessity Goods

How does demand respond when income changes? Different types of goods respond very differently. Drag the income slider to see the effect on all three goods simultaneously.

Income:₹50,000

Normal Goods

Demand rises with income. e.g., branded clothes, electronics, restaurant meals.

012345601234567↑ Income → Demand ↑
Positive Income Effect

Inferior Goods

Demand falls as income rises. e.g., coarse cereals, cheap substitutes.

012345601234567↑ Income → Demand ↓
Negative Income Effect

Necessity Goods

Demand remains stable regardless of income. e.g., salt, basic food, medicines.

012345601234567↑ Income → No change
Stable Demand

Kinds of Demand

Demand is categorized into 9 distinct kinds, each based on different criteria. Recognizing the kind of demand helps analyze markets more precisely.

Price Demand

Quantity demanded at different prices of the commodity itself. Most common type.

Income Demand

Quantity demanded at different income levels of the consumer.

Cross Demand

Demand depending on the price of related goods (substitutes or complements).

Joint Demand

Demand for goods used together. e.g., car and petrol, pen and ink.

Composite Demand

Demand for a commodity with multiple uses. e.g., milk (drinking, cheese, butter), electricity.

Derived Demand

Demand for a factor of production derived from demand for final product. e.g., labour for manufacturing.

Direct Demand

Demand for goods meant for final consumption. e.g., food, clothes.

Alternative Demand

Demand for goods that can be used for alternative purposes. If one is unavailable, another suffices.

Competitive Demand

Demand for goods competing for limited consumer income. e.g., phone vs laptop.

Key Takeaways

  • Substitute goods have a positive cross price effect: Price of X↑ → Demand for Y↑.
  • Complementary goods have a negative cross price effect: Price of X↑ → Demand for Y↓.
  • Normal goods: demand rises with income. Inferior goods: demand falls with income. Necessity goods: demand is stable.
  • Giffen goods are a special type of inferior goods where demand rises with price (Giffen's Paradox).
  • There are 9 kinds of demand: Price, Income, Cross, Joint, Composite, Derived, Direct, Alternative, and Competitive.
  • Cross demand depends not on the good's own price but on prices of related goods.