Question

Substitute products A and B are produced by different firms. Give a reason why a change in the price of product A will bring about a change in quantity demanded for product B.

Answer 1

When the price of product A changes, it directly influences the relative appeal and opportunity cost of acquiring product B, because customers regard the two products as interchangeable alternatives.

The Substitution Effect:

1. Price of A rises: Product B becomes somewhat cheaper in comparison, even though its own price remains the same. Consumers who want to maximize their utility while conserving money will abandon the now-expensive product A and buy more of product B instead.
2. Price of A falls: Product A becomes a better offer than product B. Consumers who previously purchased product B will move to product A, leading the quantity requested for product B to fall.

Because these two goods satisfy the same consumer need or want, they have a positive cross-price elasticity of demand. This means that demand for product B constantly follows the price of its counterpart, product A.