If there is an increase in the price of a substitute good, it will cause a shift in the demand curve for the original good. The demand curve (D) will shift to the left.
The shift in the demand curve to the left indicates a decrease in demand for the original good. This is because consumers now find the substitute good more attractive due to the increase in its price, leading them to buy less of the original good.
As a result, the market clearing price (equilibrium price) and the equilibrium quantity will decrease. The new equilibrium point will be at a lower price (P2) and a lower quantity (Q2).
Consider the figure to the right. The current demand and supply curves are Upper D 1
and Upper S 1
,
at which the equilibrium price and quantity are Upper P 1
and Upper Q 1
.
If there is an increase
in the price of an item that consumers regard as a substitute for this good, which curve shifts, and in which direction does it shift? What happens to the market clearing price and to the equilibrium quantity?
1 answer