Correct Option: C. Demand for the original good increases
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 might buy more tea instead, as tea serves as a substitute for coffee.
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Price Increase of a Substitute:
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When the price of a substitute good increases, it becomes more expensive for consumers to purchase that good. As a result, consumers will look for alternatives that are now relatively cheaper.
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Effect on Demand for the Original Good:
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Since the original good is a substitute, an increase in the price of the substitute will lead to an increase in the demand for the original good. This is because consumers will switch their consumption from the now more expensive substitute to the original good, which they perceive as a better value.
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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 shifts to the right because at every price level, consumers are willing to buy more of the original good due to the higher price of its substitute.
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Example:
- Suppose the price of butter increases. Consumers who typically buy butter may start buying margarine instead, leading to an increase in the demand for margarine. If the price of butter rises significantly, the demand for margarine will increase as consumers seek a more affordable option.
Why Other Options Are Incorrect:
- A. Demand for the original good decreases:
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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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B. Demand for the original good remains 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 changes significantly. The relationship between substitutes means that a price increase in one will typically lead to an increase in demand for the other.
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D. Demand for the original good increases only if income rises:
- This option is misleading. While income can affect demand, the relationship between substitute goods is independent of income changes. The demand for the original good will increase due to the price change of the substitute, regardless of whether consumer income rises or falls.
Summary of Key Points:
- 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 as consumers switch to the cheaper alternative.
- Understanding the relationship between substitutes is crucial for predicting changes in demand based on price fluctuations.