Principles of Microeconomics / Unit 17 MIC 1609 worked example, 60 to 90 seconds
Sample Question Two: A Substitute's Price Falls
The idea
Read the event, name the related good's relation, and shift the right curve of the market asked about. A substitute's price falls: buyers switch to it, so demand for the good in question shifts left, and both its price and quantity fall. A substitute's price rises: demand shifts right, both rise. A complement's price falls: demand for the good shifts right; rises, left. The good's own price is never the shifter; it is the answer.
In practice
Worked example: tea and coffee are substitutes. A tea harvest cuts tea's price. Coffee drinkers switch some cups to tea, so the demand for coffee shifts left; coffee's price falls from six dollars to five and its quantity from twenty-five million pounds to twenty. Supply of coffee did not move; the lower price moved sellers along it. Now milk and cereal, complements: a milk price cut raises the demand for cereal, and cereal's price and quantity rise. In each case the shift is in demand, because the event changed what buyers want at every price of the good asked about.
Where people slip
The exam's key is the fall in both price and quantity of the other good; a student who shifts supply, or who moves along demand because coffee got cheaper, gets one of them wrong. And the cross-price sign is the test: positive for substitutes, negative for complements, from unit four.
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