The correct option is
C. 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 tea serves as a substitute for coffee.
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Impact of Price Increase on Demand:
- When the price of a substitute good increases, consumers will look for alternatives that are now relatively cheaper. This leads to an increase in the quantity demanded for the original good.
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In our example, if the price of coffee rises, consumers will likely buy more tea, leading to an increase in the demand for tea.
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Demand Curve Shift:
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The demand curve for the original good (in this case, tea) will shift to the right. This shift indicates that at every price level, consumers are willing to purchase more of the original good due to the higher price of its substitute.
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Law of Demand:
- The law of demand states that, all else being equal, as the price of a good decreases, the quantity demanded increases, and vice versa. However, when considering substitutes, the relationship is about relative prices. An increase in the price of a substitute good makes the original good more attractive, thus increasing its demand.
Why Other Options Are Incorrect:
- 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 makes the original good more appealing, leading to an increase in demand.
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B. Demand for the original good will remain unchanged:
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This option is also incorrect. If the price of a substitute good increases, it is unlikely that the demand for the original good will remain unchanged. Consumers will respond to the price change by adjusting their purchasing behavior.
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D. Demand for the original good will become elastic:
- This option is misleading. Elasticity refers to how sensitive the quantity demanded is to a change in price. While the demand for the original good may become more elastic if consumers have more substitutes available, the question specifically asks about the effect of a price increase in a substitute good on the demand for the original good. The demand itself is likely to increase, not necessarily become elastic.
Summary of Key Points:
- Substitute goods are products that can replace each other; an increase in the price of one leads to an increase in demand for the other.
- The demand curve for the original good shifts to the right when the price of a substitute increases.
- The law of demand and consumer behavior dictate that consumers will seek alternatives when prices change.
- Understanding the relationship between substitutes is crucial for analyzing market dynamics.
This understanding of substitutes and their impact on demand is essential for grasping broader economic concepts and market behaviors.