Question

Given the following market demand function for the commodity X Q=f(P,, P., P, I.T.A)

where

P= Price of the commodity X P= Price of a substitute commodity Y

P= Price of commodity Z which is complement of X

1 = Level of per captia income of consumers T=Tastes and preferences of consumers A = Advertising expenditure by a firm producing X

How will the market demand for a commodity change? (1) if price of the commodity X rises,

(ii) if price of the substitute good Y rises, (iii) if price of complementary commodity Z falls,

(iv) per capita income (I) of the consumers rises,

(v) the firm producing X increases its advertisement expenditure.

Answer 1

i) If the price of the commodity X rises,

This will increase demand for commodity Y which is a substitute for commodity X. On the other hand, the demand for commodity Z will fall since it is a complement of commodity X.

ii). If the price of the substitute good Y rises,

The demand for commodity Y will decrease. Hence the demand for commodity X will rise leading to an increase in demand for commodity Z which is a compliment.

iii). If the price of complementary commodity Z falls,

Demand for commodity Z will increase leading to an increase in demand for commodity X. On the other hand, the demand for substitute Y will fall.

iv). Per capita income (I) of the consumers rises,

The demand for all commodities will rise since the consumers have more cash to spend.