Question

Given a downsloping demand curve and an upsloping supply curve for a product, an increase in the price of a substitute good (from the buyer's perspective) willA. increase equilibrium price and decrease equilibrium quantityB. decrease equilibrium price and quantity.C. increase equilibrium price and quantity.D. decrease equilibrium price and increase equilibrium quantity

Answer 1

Answer:

C. increase equilibrium price and quantity

Explanation:

The demand for substitute goods is inversely related. An increase in the price of a substitute good will cause its demand to reduce. The demand for the other product will increase as customers will prefer the cheaper product.

In the graphs showing both the supply and demand curve, the equilibrium point is the prevailing market rate.  As per the law of supply and demand, an increase in demand results in increased prices. High demand means many buyers are chasing few goods. Suppliers will have to supply more but a higher price to meet the new demand. An increase in demand causes the equilibrium price to shift upward to reflect the new high price.