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.

Answer 1

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.