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ACCA Applied Knowledge · Business and Technology · Microeconomic factors

In the market for tea, the price of coffee, a substitute, rises sharply while everything else stays constant. What is the most likely effect on the tea market?

Demand for tea shifts right, raising both equilibrium price and quantity. When a substitute becomes more expensive, consumers switch to tea at every price level. Tea supply conditions are unchanged, so only the demand curve moves.

  1. ADemand for tea shifts right, raising equilibrium price and quantityCorrect
  2. BDemand for tea shifts left, lowering equilibrium price and quantity
  3. CSupply of tea shifts right, lowering equilibrium price
  4. DSupply of tea shifts left, raising equilibrium price and lowering quantity

Explanation

Consumers switch from the dearer coffee to tea, so demand for tea increases at every price. The demand curve shifts right, giving a higher equilibrium price and a higher quantity traded. Supply is unaffected, so the supply-based options are wrong.

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