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CMA Foundation · Fundamentals of Business Economics and Management · The Fundamentals of Economics

The price of coffee, a substitute for tea, rises sharply. What is the likely effect on the market for tea?

Demand for tea increases, shifting its demand curve to the right. Coffee is a substitute, so when its price rises consumers switch to tea at every price of tea. Since tea's own price did not change, this is a shift and not a movement along the curve.

  1. ADemand for tea increases, shifting its demand curve to the rightCorrect
  2. BDemand for tea decreases, shifting its demand curve to the left
  3. CQuantity demanded of tea contracts along the same curve
  4. DDemand for tea is unchanged because tea's price has not changed

Explanation

Coffee and tea are substitutes, so when coffee becomes costlier consumers switch to tea. Demand for tea rises at every price, a rightward shift. It is not a movement along the curve because tea's own price has not changed. The leftward shift would occur for a complement becoming costlier.

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