A and B are substitute goods. Explain the effect of rise in price of A on the demand for B.
Answers
Explanation:
Substitute goods means those which can be used in absence of each other. For example, tea and coffee , different brands of toothpaste, etc.
If tea's price rises, even if the price of coffee remains the same, people will prefer coffee more as a beverage because it's price is lesser than the new price of tea.
Suppose, the price of XYZ toothpaste is Rs. 100 and that of ABC toothpaste is Rs. 105. If the price of XYZ increases to 110, people will prefer ABC as it's price is lesser than XYZ.
Hence, If there is rise in price of A, it's substitute i.e B's demand increases. Therefore , we can say that there is a direct relationship between price of a good and the demand of it's substitute good.
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