If good A and good B are substitutes and the price of good A rises, then in the market for good B this will result in a(n)
A increase in demand
B decrease in supply
C decrease in demand
D increase in supply
The correct answer and explanation is:
The correct answer is A: increase in demand.
When two goods, A and B, are substitutes, it means that consumers can use one in place of the other. So, if the price of good A rises, consumers will likely buy more of good B instead, because it becomes relatively cheaper compared to good A. This shift in consumer preference leads to an increase in demand for good B.
To break it down:
- Substitute goods are those that can replace each other in consumption. For instance, if the price of coffee (good A) increases, people who typically drink coffee might switch to tea (good B) as a substitute. This behavior is motivated by price differences and consumers’ desire to maximize utility (satisfaction) while minimizing costs.
- Price increase of good A: When the price of good A rises, the purchasing power of consumers is affected. As a result, they are more likely to look for cheaper alternatives to satisfy the same needs. If good B is a substitute, it will attract more consumers, driving up its demand.
- Demand curve for good B shifts: An increase in demand is represented by a rightward shift in the demand curve for good B. This shift means that, at each price level for good B, consumers are now willing to purchase more of it due to the price increase of its substitute, good A.
- Market outcome: In the short term, this increased demand for good B may lead to higher prices for good B, as suppliers may not be immediately able to meet the new demand. Over time, suppliers may increase production of good B to capitalize on the increased demand, further affecting the market equilibrium.
In conclusion, a rise in the price of a substitute good (good A) leads to a higher demand for good B, because consumers switch to the cheaper alternative.