Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What happens to the equilibrium price if the price of a substitute good rises?

1. The equilibrium price will decrease

2. The equilibrium price will remain the same

3. The equilibrium price will increase

4. The equilibrium price will become volatile

The correct answer is: The equilibrium price will increase

When the price of a substitute good rises, consumers tend to shift their purchasing behavior towards the relatively cheaper alternative. This increase in demand for the substitute good causes the demand curve for the original good to shift to the right, leading to a higher equilibrium price. Market dynamics dictate that as demand increases while supply remains constant, competition among buyers drives the price up. Therefore, an increase in the price of a substitute typically results in an increase in the equilibrium price of the original good. In this context, the supply of the original good does not change immediately, but the heightened demand triggered by the increased substitute price creates upward pressure on the equilibrium price until a new balance is achieved in the market.