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Question
How does change in the price of a substitute good affect the demand of the given good? Explain with the help of an example.
Solution
Substitute goods are goods which can be purchased in place of each other. The demand for
a commodity is in relation to the price of its substitute good. Assume tea and coffee as two
substitute goods. D1 is the demand curve for the demand for tea in the diagram.
When the price of tea is OP1, the quantity demanded is OT1 as shown in Fig (a). If there is an
increase in the price of the substitute good coffee, then the demand curve for tea shifts to
the right. Now, the consumer is willing to buy the P1C2 quantity of tea which is equal to OT2.
Greater the purchase of a commodity at its constant price points to a situation of increase
or forward shift in the demand curve. The consumer demand curve shifts from D1 to D2,
consuming more of tea even when its price is constant.
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| (A) | (B) | (C) |
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