ECONOMICS
DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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When the price of one item goes up, so the price of another goes up with it
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When the price of pencils goes up, people will buy pens instead
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When someone decides something is popular, they buy more of it.
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None of the above
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Detailed explanation-1: -Examples of the Substitution Effect Beef prices rise and consumers respond by purchasing more turkey or chicken. Premium coffee prices at a coffee shop rise, and consumers respond by buying store brand coffee.
Detailed explanation-2: -In this case, pens and pencils can be considered as substitute goods. This is because they yield same benefits to the consumer. For instance, both pen and pencil are used for writing. They can be used interchangeably.
Detailed explanation-3: -The substitution effect is the decrease in sales for a product that can be attributed to consumers switching to cheaper alternatives when its price rises. When the price of a product or service increases but the buyer’s income stays the same, the substitution effect generally kicks in.
Detailed explanation-4: -Since pens and pencils are substitutes, a fall in the price of pens will increase the demand for pens and decrease the demand for pencils. The demand curve for pencils will shift to the left, reducing the number of pencils exchanged in the market, followed by a fall in the price of pencils.