Two goods are substitutes when a decrease in the price of one good
a. decreases the demand for the other good.
b. decreases the quantity demanded of the other good.
c. increases the demand for the other good.
d. increases the quantity demanded of the other good.
The correct answer and explanation is :
The correct answer is a. decreases the demand for the other good.
Explanation:
Two goods are considered substitutes when an increase in the price of one good leads to an increase in the demand for the other, and conversely, a decrease in the price of one good results in a decrease in the demand for the other. Substitutes are products or services that can replace each other in use or function, meaning consumers are willing to switch between them based on price changes.
For example, let’s consider two goods: coffee and tea. If the price of coffee decreases, consumers might choose to buy more coffee and less tea because coffee is now more affordable compared to tea. As a result, the demand for tea decreases because consumers are substituting coffee for tea. Similarly, if the price of tea decreases, people may choose to buy more tea and less coffee, leading to a decrease in the demand for coffee.
This negative relationship between the price of one good and the demand for the other is the key characteristic of substitute goods. So, when the price of one good decreases, it makes the substitute good less attractive, leading to a decrease in its demand. This is in contrast to complementary goods, where a decrease in the price of one good increases the demand for the other good (e.g., if the price of printers falls, the demand for printer paper might increase).
In summary, substitutes exhibit an inverse relationship in terms of demand: a decrease in the price of one good decreases the demand for its substitute, as consumers will typically buy more of the cheaper option and less of the other.
Image:
Here is an illustration showing the relationship between the price of coffee and the demand for both coffee and tea. As the price of coffee decreases, the demand for coffee increases, while the demand for tea decreases.