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Question
Good Y is a substitute of good X. The price of Y falls. Explain the chain of effects of this change in the market of X.
Solution
Substitute goods refer to goods which can be consumed instead of each other. For example, tea and coffee are substitute goods. In case of substitute goods, the demand for a good share a positive relation with the price of the substitute good.
Fall in price of substitute good Y: With a fall in the price of the substitute good Y, the demand of the concerned good falls. For example, with a fall in the price of coffee, the demand for tea increases.
According to the diagram, DD is the initial demand curve for good X. At price OP, OQ quantity of good X is demanded. With a fall in the price of good Y, the demand for good X falls. Accordingly, the demand curve for good X shifts parallelly leftwards to D′D′. Here, even at the existing price OP, the quantity demand of good X falls to OQ′.
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| Price of Ice Cream (₹) | Quantity Supplied | Market Supply | ||
| Seller A | Seller B | Seller C | (A + B + C) | |
| 50 | 0 | 2 | 5 | 7 |
| 100 | 1 | `square` | 10 | 15 |
| 150 | `square` | 6 | 15 | 23 |
| 200 | 3 | 8 | 20 | `square` |
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| (A) | (B) | (C) |
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