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Difficulty: MediumDeterminants and Changes in Demand

Tea and coffee are substitute goods in competitive demand. If the price of coffee rises significantly while the price of tea remains unchanged, which of the following market changes will occur for tea?

  1. A rightward shift in the demand curve for teaAnswer
  2. B
    A leftward shift in the demand curve for tea
  3. C
    An upward movement along the demand curve for tea
  4. D
    A downward movement along the demand curve for tea

Answer

A rightward shift in the demand curve for tea
Tea and coffee are substitutes in competitive demand. When the price of coffee increases while the price of tea remains constant, tea becomes relatively less expensive. Consumers reallocate their purchases from coffee to tea, increasing total market demand for tea at every price level. This non-price factor causes an outward (rightward) shift of the demand curve for tea.

Step-by-Step Solution

1
Identify the economic relationship between the two goods
Tea and coffee are substitute goods in competitive demand.
They satisfy similar consumer needs and serve as alternative choices.
2
Analyze consumer behavior following the price change of coffee
The increase in coffee price causes consumers to demand more tea at existing prices.
Consumers substitute away from the relatively more expensive good (coffee) toward the relatively cheaper alternative (tea).
3
Determine the graphical impact on the demand curve for tea
The entire demand curve for tea shifts outward to the right.
A change in the price of a substitute good is a non-price determinant of demand for tea, causing a shift in the entire demand curve rather than a movement along the curve.

Key Concept

Determinants of Demand: Prices of Substitute Goods
Estimated Time:1m 0s
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Topics

Determinants and Changes in Demand

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