What Happens When a Substitute Product's Price Decreases?

What happens in the market when the price of a substitute product decreases?

Does it affect the equilibrium price and quantity demanded of the other substitute?

Answer:

If a substitute product's price decreases, the equilibrium price of the other substitute will increase, and the equilibrium quantity demanded of the other substitute will decrease.

When a substitute product's price decreases, it can have a significant impact on the market dynamics. Let's take the example of Pizza Hut and Domino's as substitutes in consumption. If Pizza Hut, a substitute for Domino's, reduces its prices, the equilibrium price of Domino's will increase, and the equilibrium quantity demanded of Domino's will decrease.

This change occurs because when the price of Pizza Hut decreases, more consumers will prefer to buy Pizza Hut over Domino's due to the cheaper price. As a result, there will be a shift in demand from Domino's to Pizza Hut, leading to a decrease in the equilibrium quantity demanded of Domino's.

In economic terms, Pizza Hut and Domino's serve as substitute goods, similar to how plane tickets and train tickets can be substitutes. When the price of one substitute decreases, consumers tend to substitute towards the cheaper option, causing a decrease in the consumption of the other substitute.