explain how the equilibrium price and quantity of a commodity are affected by a fall in the price of its substitutes?
We know that Coffee and Tea are substitute goods to each other. In the figure below, D2D2 represents the initial demand curve for tea. S1S1 represents the market supply of tea. The initial equilibrium is E1 and initial equilibrium quantity is Oq2.
Now, let's assume that the price of coffee falls. This will make coffee relatively cheaper and demand for coffee increases. People substitute tea for coffee. As a result, the demand for tea falls. This is represented by the leftwards parallel shift of the demand curve to D2D2. At the equilibrium price (Pe), there will be an excess supply. Consequently, the price of tea falls. The price of tea continues to fall until it reaches OP2, where the new demand curve intersects the initial supply curve. The new equilibrium is established at E2, with the new equilibrium price OP2 and the new equilibrium output Oq2. Hence, a decrease in the price of coffee resulted in decrease in the demand for tea, as people switches over to consumption of coffee.
