Answer to Question #206090 in Macroeconomics for khan

Question

Ahmad travel for islamabad by using his personal car but increase the prices of petrol and forced him to use local van discus it

Answer 1

Here, using personal cars or local vans acts as substitutes for each other & petrol and personal cars being the complementary goods. Substitute goods are those where the increase in price of one substitute good, increases the demand for the other substitute good and if there is decline in the price of one substitute good, the demand for the other substitute good decreases. Whereas, complementary goods are those where the increase in price of one good, increases the cost of using its complementary goods and vice versa.

In this situation, when Ahmad travels, as the prices of petrol have been increased and it would cost him more using his personal car to travel to Islamabad, he would use the substitute of his personal car here, that is the local van. Using a local van due to the increased price of petrol would cost him less in comparison to using his own personal car. Therefore, being a rational consumer, Ahmad would increase the demand for local vans and would choose to travel with the local van.