Consider the figure to the right. The current demand and supply curves are Upper D 1
and Upper S 1
,
at which the equilibrium price and quantity are Upper P 1
and Upper Q 1
.
If there is an increase
in the price of an item that consumers regard as a substitute for this good, which curve shifts, and in which direction does it shift? What happens to the market clearing price and to the equilibrium quantity?
If there is an increase in the price of a substitute good, it will cause a shift in the demand curve for the original good. The demand curve (D) will shift to the left.
The shift in the demand curve to the left indicates a decrease in demand for the original good. This is because consumers now find the substitute good more attractive due to the increase in its price, leading them to buy less of the original good.
As a result, the market clearing price (equilibrium price) and the equilibrium quantity will decrease. The new equilibrium point will be at a lower price (P2) and a lower quantity (Q2).
When there is an increase in the price of a substitute good, the demand curve shifts. Specifically, the demand curve (D) will shift to the left (decrease).
With the decrease in demand, the market clearing price (equilibrium price) will decrease, and the equilibrium quantity will also decrease.
In conclusion, when the price of a substitute good increases, the demand curve shifts to the left, resulting in a decrease in the market clearing price and equilibrium quantity.
To analyze the effect of an increase in the price of a substitute good on the market for a particular good, we need to understand the relationships between the goods and their respective demand and supply curves.
When the price of a substitute good increases, consumers tend to shift their demand towards the original good, as it becomes relatively cheaper compared to the substitute. This shift in consumer behavior will affect the market for the original good.
To determine which curve shifts and in which direction, we need to consider the demand side. Since the price of a substitute good has increased, it impacts the demand for the original good. As a result, the demand curve for the original good (D1) will shift to the right.
To understand the impact on the market clearing price and equilibrium quantity, we need to consider the interaction between the new demand curve and the existing supply curve (S1).
As the demand curve shifts to the right, it signifies that consumers are willing to purchase more at each price level. This will result in an increase in both the market clearing price and the equilibrium quantity.
Therefore, in summary:
- The demand curve (D1) shifts to the right due to an increase in the price of a substitute good.
- The market clearing price (P1) and the equilibrium quantity (Q1) both increase due to the higher demand for the original good.
It is important to note that this analysis assumes ceteris paribus, meaning that other factors such as production costs, technology, and preferences remain constant. In reality, these factors can also impact the market outcome.