This is a continuation of your second reading assignment, pp. 59-78.

Another factor that could lead to a shift in demand is a change in the price of a substitute good. A substitute product is either identical or similar to the good under consideration. Some substitutes, such as Coke and Pepsi, are considered close substitutes while others, such as coffee and tea, are weaker substitutes. If the price of one (Coke) drops and the quantity demanded of the other (Pepsi) also drops, then the goods are considered substitutes. If the price of one (Coke) rises and the quantity demanded of the other (Pepsi) also rises, then the goods are substitutes. In other words, there is a direct relationship between the change in price of the substitute and the demand for the main product. Can you set up sketch graphs to illustrate this?

In our pizza example, a reduction in the price of Mexican food could lead to a reduced demand for pizza while an increase in the price of Mexican food should result in a rise in pizza demand. Using the sketch format, set up graphs to illustrate the effects of these changes.

Solutions: