Effect of demand for commodity on substitution of goods is given below.
Step-by-step explanation:
- When the price of a good decreases, then the quantity demanded of one increases and the demand for the other increases. When the price of a substitute good decreases, the quantity demanded for that good increases, but the demand for the good that it is being substituted for decreases.
- A change (increase or decrease) in the price of substitutes directly affects the demand for a given commodity. (ii) Decrease in Price of Substitute Goods: With decrease in price of substitute goods (coffee), demand for the given commodity (tea) also decreases from OQ to OQ1 at the same price of OP.
- The substitution effect refers to the change in demand for a good as a result of a change in the relative price of the good compared to that of other substitute goods. For example, when the price of a good rises, it becomes more expensive relative to other goods in the market.
- A change in the price of a substitute-in-consumption causes a change in demand and a shift of the demand curve. An increase in the price of one substitute good causes an increase in demand for the other. A decrease in the price of one substitute good causes a decrease in demand for the other.
- The prices of complementary or substitute goods also shift the demand curve. When the price of a good that complements a good decreases, then the quantity demanded of one increases and the demand for the other increases.