If two goods are substitutes, what happens when the price of one rises?

Question

BlackTom AI · Accepted Answer

Let’s break down the scenario to understand how substitutability affects demand when the price of one good changes.
Option A: 'Supply for one good will increase.' This statement confuses demand with supply. The price change of one good influences the demand for related goods, not the supply decisions of that good, so this option misattributes the effect to supply dynamics.
Option B: 'Demand for both goods increases.' If two goods are substitutes, an increase in the price of one makes consumers shift toward the other substitute, not raise demand for both. Therefore, this option overstates the effect and is inconsistent with the substitute relationship.
Option C: 'Demand for the first good decreases.' When the price of the first good rises, buyers tend to purchase less of it, all else equal. Since the goods are substitutes, some of the demand shifts away from the now more expensive good, reducing its quantity demanded. This aligns with the standard substitution effect and is therefore correct.
Option D: 'Demand for the other good will increase.' With one substitute becoming relatively more expensive, consumers substitute toward the cheaper alternative, boosting its demand. This is the classic substitution effect in action for substitutes.
In summary, the two correct implications in this scenario are that the first good’s demand falls when its price rises, and the other substitute’s demand rises as consumers switch resources to the cheaper option. The remaining options misstate the mechanism by referring to supply changes or to a universal increase in demand across both goods.

If two goods are substitutes, what happens when the price of one rises?

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