Correct Option: B. Demand for the original good will increase
Detailed Explanation:
- Understanding Substitute Goods:
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Substitute goods are products that can replace each other in consumption. For example, if the price of coffee increases, consumers might buy more tea instead, as both serve a similar purpose (caffeine consumption).
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Price Increase of Substitute Good:
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When the price of a substitute good rises, it becomes more expensive for consumers. This price change affects consumer behavior, as they seek to maximize their utility (satisfaction) while minimizing costs.
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Effect on Demand for the Original Good:
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As the price of the substitute good increases, consumers will likely shift their consumption towards the original good because it is now relatively cheaper. This shift in preference leads to an increase in the quantity demanded for the original good.
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Demand Curve Shift:
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In economic terms, this situation is represented by a rightward shift in the demand curve for the original good. The demand curve illustrates the relationship between the price of a good and the quantity demanded. When demand increases, at every price level, consumers are willing to buy more of the original good.
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Example:
- Suppose the price of butter increases. Consumers who typically buy butter may start purchasing margarine instead, which is a substitute. As a result, the demand for margarine (the original good in this case) will increase.
Why Other Options Are Incorrect:
- Option A: Demand for the original good will decrease:
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This option is incorrect because an increase in the price of a substitute does not lead to a decrease in demand for the original good. Instead, it encourages consumers to buy more of the original good.
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Option C: Demand for the original good will remain unchanged:
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This option is also incorrect. The demand for the original good cannot remain unchanged when the price of a substitute good changes. Economic theory suggests that demand is responsive to price changes of related goods.
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Option D: Demand for the original good will become perfectly inelastic:
- This option is incorrect because perfect inelasticity means that demand does not change regardless of price changes. However, in this scenario, the demand for the original good is expected to increase due to the price rise of the substitute, indicating that demand is responsive to price changes.
Common Pitfalls:
- Confusing Substitutes with Complements:
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It’s important to remember that substitutes are different from complementary goods. An increase in the price of complementary goods (like printers and ink) would decrease the demand for the original good, while substitutes work in the opposite manner.
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Assuming All Consumers React the Same Way:
- Not all consumers will react identically to price changes. Some may have strong brand loyalty or preferences that prevent them from switching, but on average, the demand for the original good will increase.
Revision Summary:
- Substitute goods are products that can replace each other in consumption.
- An increase in the price of a substitute good leads to an increase in demand for the original good.
- The demand curve for the original good shifts to the right due to the price change.
- Understanding the relationship between substitutes and demand is crucial for analyzing market behavior.