Business: If the price of a good rises, what impact will this have on a cheaper substitute good?
First of all, for the purposes of this assignment, it is important to note that a substitute good is one that can be used in the place of another. This means that in a competitive consumer market, consumers have the ability to switch from one good to another (Samuelson, 2006, p.57). There are various factors that cause customers to prefer one good to the other. One of these factors is pricing. In case one of the substitutes good raises its price, there is a greater likelihood that there will be more demand of the cheaper substitute good.
Many people would opt to consumer a good that they do not necessarily prefer so as to save some money. However, one thing that is worth noting is that even though the demand of a given product increases, suppliers of the good to the market are not only interested in increasing the supply of the good to the market. Instead, producers intend to maximize their profits from the good that now has a higher demand in the market. This means that suppliers will organize the trading of the good in such a way that they take advantage of the high demand and at the same time fetch higher profits. This means that an increase in the demand of a given substitute good would cause the price of that good to go up (Tucker, 2000, p.66). This is because one of the key goals of suppliers within a perfectly competitive market is to maximize their gains.
One of the ways in which the suppliers of the cheaper substitute good are able to raise their price of the good is by reducing the amount of the good in the market. A scarcity in the price of the good causes the price of equilibrium price of the good to rise. Considering that consumers were initially opting to purchase the substitute good due to a higher a level that the prices of both substitute goods balance out (Hall, 2001, p.137). Even though the prices of both substitute goods might not necessary equalize, the differences in price become very insignificant such that it is difficult for pricing to be used as a way of going for one good instead of another.
In addition, it is worthy not to forget that substitute goods are more similar and almost require the same factors of production and ingredients for their production. This means that the factors that might have led to the increase in price of one substitute good might also affect another substitute good (Gordon, 1972, p.65). Therefore, the factors leading to a higher pricing in one might over time affect the substitute good thus prompting a hike in price. It is also important to understand that the saturation of the market with a given good makes the price of the good go down because the suppliers of the good are not only able to meet the needs of the customers in the market but are also able to create a consumer surplus that in most cases is a deadweight loss in the part of producers.
Therefore, in order to deal with the loses made by having a cheaper substitute good , most suppliers would respond by reducing the amount of the cheaper substitute good in the market so as to fetch a higher market price. It is hence plausible to conclude that if the price of one substitute good goes up; the impact of this to the cheaper substitute good is that its demand will increase. This increase in demand will cause the producers to raise their prices on the good by enhancing the scarcity of the good.
References
Gordon, S. D., & Dawson, G. G. (1972). Introductory Economics. Lexington, Mass.: Heath.
Hall, R. E., & Lieberman, M. (2001). Microeconomics: principles and applications (2nd Ed.). Cincinnati, Ohio: South-Western College Publishers.
Samuelson, W., & Marks, S. G. (2006). Managerial Economics (5th Ed.). Hoboken, NJ: John Wiley and Sons.
Tucker, I. B. (2000). Macroeconomics for today (2nd Ed.). Cincinnati, OH: South-Western College.
