question_answer

How is the equilibrium price of a commodity affected by a rise in the price of its substitutes? Explain the chain of effects.

Answer:

With a rise in the price of substitute good (coffee), the demand for the concerned good (tea) increases. As a result, the demand curve of the concerned good shifts to the right. Accordingly the equilibrium price would tend to increase and equilibrium quantity also increases,          Quantity of concerned good Diagram showing increase in equilibrium price and quantity In the given diagram, initial demand and supply curves intersect at point 'E'. With increase in the price of substitute goods, the demand of the concerned good increases and because of this demand curve DD shifts rightwards to\[{{D}_{1}}{{D}_{1}}\].Because of this, the equilibrium point shifts to\[{{E}_{1}}\].Corresponding to this point, the equilibrium price has risen to\[O{{P}_{1}}\] and equilibrium quantity has rise to\[O{{Q}_{1}}\]