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If two commodities are substitutes, then an increase in the price of one of them will increase the demand for the other.

Question

If two commodities are substitutes, then an increase in the price of one of them will increase the demand for the other.

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Solution

Yes, that's correct. If two commodities are substitutes, an increase in the price of one will lead to an increase in the demand for the other. Here's a step-by-step explanation:

  1. Substitutes are goods that can be used in place of each other. For example, tea and coffee are substitutes. If the price of coffee increases, people may switch to drinking tea because it's cheaper.

  2. When the price of a good (let's say Good A) increases, consumers will look for alternatives to maintain their level of satisfaction without having to spend more money.

  3. If there's a substitute available (Good B), consumers will increase their demand for Good B as it becomes a more attractive option due to the increased price of Good A.

  4. This shift in demand is due to the substitution effect, which is the idea that as prices rise (or income decreases), consumers will replace more expensive items with less costly alternatives.

So, in conclusion, an increase in the price of one substitute good will lead to an increase in the demand for its substitute.

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