In a perfectly competitive market, how does an increase in the price of a substitute product affect the demand for the original product?
In a perfectly competitive market, an increase in the price of a substitute product will generally lead to an increase in the demand for the original product. This is because consumers will likely switch from the more expensive substitute product to the original product, which remains relatively cheaper.
When the price of a substitute product increases, consumers will perceive the original product as a more attractive and cost-effective option. As a result, they will tend to shift their demand towards the original product, potentially increasing their purchases.
The magnitude of the shift in demand will depend on the availability and closeness of substitutes. If there are many close substitutes for the original product, the increase in demand is likely to be higher, as consumers have more options to switch from. Conversely, if there are limited substitutes available, the increase in demand may be relatively smaller.
It's important to note that this analysis assumes a perfectly competitive market, where all firms offer homogeneous products and there are no barriers to entry or exit. In reality, market conditions may differ, and the actual impact on demand may vary.