Stone and brick are substitutes in home construction. Consider the market for bricks depicted in the graph. Suppose the price of stone increases due to new regulations for the stone quarrying industry. Illustrate the impact this will have on the market for bricks.
Equilibrium price
A. remains constant.
B. increases.
C. decreases.
D. may increase or decrease, but it is impossible to know for sure.
The Correct Answer and Explanation is:
Correct Answer: B. Increases.
When analyzing how changes in the market for one good affect its substitute, it’s important to understand the concept of substitute goods. Substitute goods are products that can be used in place of each other. In this case, stone and brick are substitutes in home construction, meaning if the price of one increases, consumers will likely switch to the other to minimize costs.
The scenario presented states that the price of stone increases due to new regulations impacting the stone quarrying industry. This price increase makes stone more expensive and less attractive to buyers. As a result, builders and consumers will look for a cheaper alternative — in this case, bricks. Because bricks and stones serve similar purposes, the demand for bricks will increase as consumers substitute bricks for the now more expensive stone.
On a supply and demand graph, an increase in demand for bricks is shown by a rightward shift of the demand curve. When the demand curve shifts right while supply remains constant, a new equilibrium is established at a higher price and a higher quantity.
Thus, the equilibrium price of bricks increases, and the equilibrium quantity also rises. The supply curve does not shift, because there is no mention of a change in the production cost or availability of bricks — the only change is in consumer behavior due to the increase in the price of stone.
In conclusion, as stone becomes more expensive, the demand for bricks rises, pushing the market toward a new equilibrium with a higher price for bricks. Therefore, the correct answer is B. increases. This scenario demonstrates the classic economic principle that the price of a substitute good can directly impact the demand and price of another good in the same market.