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CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply

Coffee and tea are substitutes. If the price of coffee rises sharply, what is the likely effect on the demand for tea, other things unchanged?

Demand for tea increases and its curve shifts right. Coffee is a substitute, so a higher coffee price makes consumers buy more tea at each tea price. Since tea's own price has not changed, this is a shift, not a movement along the curve.

  1. ADemand for tea increases, shifting its demand curve to the rightCorrect
  2. BQuantity demanded of tea expands along the same demand curve
  3. CDemand for tea decreases, shifting its demand curve to the left
  4. DQuantity demanded of tea contracts along the same demand curve

Explanation

The price of a related good is a non-price determinant of demand for tea. When coffee becomes dearer, consumers switch to tea at every price of tea, so the tea demand curve shifts right. Tea's own price has not changed, so a movement along the curve does not occur.

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