In a perfectly competitive market, an increase in the price of a substitute product typically leads to an increase in the demand for the original product.
Here's why:
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Substitute Products: Substitute products are goods that can replace one another in consumption. For example, if the price of butter rises, consumers may choose to buy more margarine instead.
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Consumer Behavior: When the price of a substitute increases, consumers react by seeking alternatives that provide similar benefits at a lower price. Since the original product is a substitute for the more expensive product, the demand for the original product rises as consumers shift their purchasing behavior towards it.
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Demand Curve Shift: This increase in demand is represented graphically by a rightward shift of the demand curve for the original product. As a result, at existing prices, consumers are willing to buy more of the original product.
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Market Equilibrium: As demand for the original product increases, the market can experience a new equilibrium point, possibly leading to higher prices and increased quantity sold for that original product as suppliers respond to the increased demand.
In summary, an increase in the price of a substitute product leads to an increase in demand for the original product in a perfectly competitive market.