How do substitutes affect demand?

1 answer:

OverLord2011 [107]3 years ago

3 0

With the increase or decrease of the prices of substitutes, the demand of the substitute goods also decreases or increases.

Explanation:

Substitutes are the products which can be used in place of another product. For example, a cup of coffee can be taken instead of a cup of tea, or Coke can be taken instead of Pepsi.

Change in the price of Substitutes can affect the demand of other substitutes. If the price of a product increases, then the demand of its substitute increases, and if the price of the product decreases, then the demand of its substitute also decreases.

We can understand this relation with an example. Suppose the product is tea. The substitute of tea is coffee. If the price of tea increases, then people will definitely move towards the substitute, which is coffee. This will increase the demand for coffee. Similarly, if the price of tea decreases, people will buy more tea than coffee, which will decrease the demand for coffee. This is how the substitutes affect demand of each other.

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