Answer to Question #189651 in Microeconomics for richa

Question

Beer and wine are two substitute goods. What happens to the supply, demand, quantity supplied and quantity demanded of wine and beer due to the following events? Explain diagrammatically. a) Increase in the price of beer b) Increase in the price of barley (ingredient for beer) c) A decrease in the income of the consumers. 

Answer 1

a) Substitute goods are those which can be used in place of one another. So, due to rise in price of beer, demand of its substitute wine will shift rightwards.

Due to this, quantity of wine rises from Q1 to Q2 and quantity of bear will fall and it’s substitute will have benefit.

b) As barley and beer are complementary goods. Complementary goods are those which are used together to satisfy particular demand. If barley price increases, then demand for its complementary beer will shift leftwards.

So, demand will shift leftwards and price and quantity of beer will fallows as shown on the diagram.

c) As decrease in the income of the consumers will lead to leftward shift of demand for both the goods (beer and wine).

Both quantity (beer and wine) will fall.