Correct Option: B. Demand for the related 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 rises, consumers may choose to buy tea instead, as it serves a similar purpose.
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The Law of Demand:
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The law of demand states that, all else being equal, as the price of a good increases, the quantity demanded for that good decreases. Conversely, if the price of a good decreases, the quantity demanded increases.
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Impact of Price Increase on Substitute Goods:
- 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 demand for the related good (the substitute).
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For example, if the price of butter increases, consumers may buy more margarine instead. The increase in the price of butter makes margarine a more attractive option, leading to an increase in its demand.
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Ceteris Paribus:
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The phrase "assuming all other factors remain constant" (ceteris paribus) is crucial here. It means we are only considering the effect of the price change of the substitute good on the demand for the related good, without any other variables affecting the situation.
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Graphical Representation:
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If we were to graph this scenario, we would see the demand curve for the related good (e.g., margarine) shift to the right. This rightward shift indicates an increase in demand at every price level due to the increase in the price of the substitute (butter).
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Conclusion:
- Therefore, when the price of a substitute good increases, the demand for the related good will increase, making option B the correct answer.
Why Other Options Are Incorrect:
- Option A: Demand for the related good will decrease:
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This option is incorrect because an increase in the price of a substitute good does not lead to a decrease in demand for the related good. Instead, it encourages consumers to switch to the related good, increasing its demand.
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Option C: Demand for the related good will remain unchanged:
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This option is also incorrect. If the price of a substitute good rises, it creates a change in consumer behavior, leading to an increase in demand for the related good. Therefore, demand cannot remain unchanged.
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Option D: Demand for the related good will become perfectly elastic:
- This option is misleading. Perfectly elastic demand means that consumers will only buy at one price and will not purchase at any other price. While the demand for the related good may increase, it does not imply that it becomes perfectly elastic. Demand elasticity is a separate concept that depends on various factors, including the availability of substitutes and consumer preferences.
Common Pitfalls:
- Confusing substitutes with complements: Remember that substitutes are goods that can replace each other, while complements are goods that are used together. An increase in the price of a complement would decrease the demand for the related good.
- Ignoring the ceteris paribus condition: Always consider that the question assumes all other factors are constant. Changes in income, consumer preferences, or other market conditions can also affect demand.
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 related good.
- The law of demand states that higher prices lead to lower quantity demanded, but this applies to the good whose price is increasing, not the substitute.
- Always consider the ceteris paribus condition when analyzing demand changes.