How will a change in price of coffee affect the equilibrium price of tea ?
Explain the effect on equilibrium quantity also through a diagram.
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Answers
Answer:
Coffee and tea are substitute goods. Let us assume that the price of coffee increases. This will cause a shift in demand curve for tea to the right as shown in Fig, D is the initial demand curve and S is the initial supply curve related to tea.E is the initial equilibrium where supply and demand curves intersect each other. OP is the equilibrium price and OQis the equilibrium quantity of tea. When the price of coffee increases, demand curve (for tea) shifts forward as indicated by D1. Consequently, equilibrium price (of tea) increases from OP to OP1 and equilibrium quantity increases from OQ to OQ1.
In case price of coffee decreases, demand curve for tea would shift to the left. Consequently, new equilibrium would indicate a fall in equilibrium quantity as well as a fall in equilibrium price.
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