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ACCA Applied Knowledge · Business and Technology · Microeconomic factors

The price of tea rises. Tea and coffee are substitutes. Which of the following is the most likely effect on the market for coffee?

Demand for coffee rises and its demand curve shifts right. Because tea is a substitute, a higher tea price pushes consumers towards coffee, so more coffee is demanded at every price. It is a shift, not a movement along the curve, since coffee's own price has not changed.

  1. ADemand for coffee falls, so the demand curve shifts left
  2. BSupply of coffee rises, so the supply curve shifts right
  3. CDemand for coffee rises, so the demand curve shifts rightCorrect
  4. DQuantity demanded of coffee rises along an unchanged demand curve

Explanation

When the price of a substitute rises, consumers switch to the alternative good. At every price of coffee more is now demanded, so the demand curve shifts right. Option D is wrong because the coffee price has not changed, so a movement along the curve is not the cause.

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