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Explain the demand for a good in relation to price of the substitute good with diagrams?

Asked by Topperlearning User 25th April 2016, 10:33 AM
Answered by Expert
Answer:

Demand for a commodity in relation to price of the substitute good:

Assume tea and coffee is the two substitute goods. D1 is the demand curve for the demand of tea in Fig (a).

Increase in price of substitute good:

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 substitute good, coffee, the demand curve for tea shifts to the right. Now, the consumer is willing to buy 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 demand curve. The consumer demand curve shifts from D1 to D2, consuming more of tea even when its price is constant.

 

  

Decrease in price of substitute good:

When there is a decrease in the price of substitute good, coffee, the demand curve for tea shifts to the left even when its price is constant. When the price of tea is OP1, the quantity demanded is OT1 as shown in the Fig (b). Now, the consumer is willing to buy P1C2 quantity of tea which is equal to OT2. Thus, the consumer shifts from D1 to D2, consuming less of tea even when the price of tea is constant. This is a situation of backward shift in demand curve.

Answered by Expert 25th April 2016, 12:33 PM
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