Understanding the Relationship Between Substitute Goods in Economics

If a 4 percent increase in the price of good X causes a 12 percent increase in the quantity demanded of good Y, what does that imply?

• A. Goods X and Y are complements
• B. The cross-price elasticity of demand is negative
• C. Goods X and Y are substitutes
• D. The cross-price elasticity of demand is zero

Answer: (C)

The relationship between goods X and Y, illustrated by the statistics given, indicates that as the price of good X increases, the quantity demanded for good Y also rises significantly. This behavior is characteristic of substitute goods—items that can replace each other in consumption. When the price of one substitute rises, consumers tend to buy more of the other substitute as it becomes relatively more attractive. In this scenario, the percentage increase in quantity demanded for good Y (12 percent) is in the same direction as the price increase of good X (4 percent), which establishes a direct relationship between the two goods. The cross-price elasticity of demand, which measures the responsiveness of the quantity demanded of one good to a change in the price of another good, is positive in this case. Specifically, since it is calculated as the percentage change in quantity demanded of good Y divided by the percentage change in price of good X, it yields a positive value, further confirming that the goods are substitutes. Therefore, determining the relationship through this positive cross-price elasticity clearly shows that goods X and Y are substitutes.

In the realm of economics, understanding how goods relate to one another can feel like decrypting a secret code—especially when you're gearing up for your UCF ECO2023 Principles of Microeconomics course. So, let's break it down with a practical example.

Imagine a scenario where there's a 4 percent increase in the price of good X, and this simple change triggers a 12 percent increase in the quantity demanded for good Y. That’s more than just numbers—it illuminates their relationship, revealing unique insights into consumer behavior. You see, when one good's price goes up and the other simultaneously enjoys higher demand, what does it suggest?

This situation leads us to the conclusion that goods X and Y are substitutes. But wait, why is that important? In our daily lives, we often find ourselves choosing between products that serve similar purposes, from coffee brands to smartphone models. When coffee prices rise, don’t you find yourself considering that tea might be a more wallet-friendly option? That's the essence of substitute goods in action!

A quick primer: substitute goods are items that can replace each other. The direct relationship we observed here—a price hike in good X correlating with an increased demand for good Y!—highlights the fundamental principle of cross-price elasticity. In such cases, the cross-price elasticity of demand is positive. You calculate this by dividing the percentage change in quantity demanded of good Y (12 percent) by the percentage change in price of good X (4 percent). This clearly shows that as one good becomes more expensive, the other becomes more attractive, leading to a rise in its demand.

It's fascinating, right? This positive cross-price elasticity emphasizes that one product’s price impacts the other’s market behavior. So next time you see a price rise on a product you love, think about what other choices you might explore. Will you opt for the generic brand? Or maybe switch entirely to a different category? That decision-making phenomenon isn’t just a personal experience; it captures a broader economic truth that’s fundamental in microeconomics.

So as you prepare for your exam, remember this: understanding how goods interact isn’t just an academic exercise. It’s a reflection of our daily lives and choices. Getting a grip on the principles of microeconomics—like the relationship between substitutes—can give you much-needed insight into market dynamics and consumer motivations. And let’s face it, who doesn't want to be a savvy consumer? That's the real win here.

Wrapping it all up, grasping concepts like substitute goods and cross-price elasticity will not only enhance your microeconomic prowess but also equip you with tools to navigate the market effectively. Keep that in mind while preparing for your exam, and you’ll be just fine.