Q14 of 38 Page 1

Good Y is a substitute of good X. The price of Y falls. Explain the chain of effects of this change in the market of X.

The demand of a commodity and the price of its substitute goods are directly related to each other. As it is given in question that X and Y are substitute goods so when the price of Y will fall, the demand of X (substitute of Y) will decrease. As a result, demand curve of X will shift towards the left.

The figure shows a situation of decrease in demand.



In the given diagram the original demand curve of commodity X is shown by DD curve, with the fall in the price of substitute good Y the demand of X falls at the same price and so the demand curve shifts from DD to D0D0 and the demand for the given good falls from Q to Q0.


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