A Level Economics AQA Practice Exam

Which of the following correctly describes a substitute good's effect on demand?

1. Rising prices of one good lead to increased demand for its substitute

2. Rising prices of a good reduce demand for its substitute

3. Prices of substitute goods have no correlation to consumer choice

4. Substitute goods only exist in luxury markets

The correct answer is: Rising prices of one good lead to increased demand for its substitute

A substitute good is one that can be used in place of another good, so when the price of one good rises, consumers often look for alternatives that fulfill a similar need or desire. As the price of the original good increases, it becomes less attractive to consumers who may opt for the substitute instead, leading to an increase in demand for that substitute good. For example, if the price of beef rises significantly, consumers may choose to buy chicken instead, resulting in higher demand for chicken. This relationship demonstrates how the demand for one good is interconnected with the price changes of its substitutes, highlighting consumer behavior in response to price fluctuations. In contrast, the other options suggest various scenarios that do not accurately reflect how substitute goods function in the market. Rising prices reducing demand for substitutes or asserting no correlation between prices and consumer choice misrepresent the dynamics of consumer substitutes in economic theory. Moreover, the notion that substitute goods only exist in luxury markets overlooks the widespread presence of substitutes across various sectors of the economy, from staple foods to everyday consumer products.