What defines two goods as substitutes?

What defines two goods as substitutes?

• A. A decrease in price of one increases the demand for the other
• B. A decrease in the price of one decreases the demand for the other
• C. An increase in income increases the demand for both
• D. The goods are used together in consumption

Answer: (A)

Two goods are defined as substitutes when a change in the price of one good directly affects the demand for the other good. Specifically, if the price of one good decreases, consumers are likely to purchase more of that good instead of the alternative. This shift typically leads to a reduction in the quantity demanded of the substitute good because consumers tend to switch to the less expensive option to save money. In this context, the relationship between the two goods highlights how consumers make choices based on price changes. When one good becomes more affordable, it attracts consumers away from its substitute, increasing its demand. This is a key concept in microeconomics, illustrating consumer behavior in response to price fluctuations. The other options relate to different concepts, such as complementary goods or general income effects, but they do not capture the specific relationship that defines substitutes.

Two goods are defined as substitutes when a change in the price of one good directly affects the demand for the other good. Specifically, if the price of one good decreases, consumers are likely to purchase more of that good instead of the alternative. This shift typically leads to a reduction in the quantity demanded of the substitute good because consumers tend to switch to the less expensive option to save money.

In this context, the relationship between the two goods highlights how consumers make choices based on price changes. When one good becomes more affordable, it attracts consumers away from its substitute, increasing its demand. This is a key concept in microeconomics, illustrating consumer behavior in response to price fluctuations.

The other options relate to different concepts, such as complementary goods or general income effects, but they do not capture the specific relationship that defines substitutes.