How does the introduction of a new substitute product shift market equilibrium?

The introduction of a new substitute product shifts market equilibrium by affecting demand, supply, and consequently, price.

When a new substitute product enters the market, it provides consumers with an alternative choice. This can lead to a decrease in the demand for the original product as some consumers may switch to the substitute. The demand curve for the original product shifts to the left, indicating a decrease in demand at each price level. This shift in demand can lead to a new market equilibrium with a lower price and quantity for the original product.

On the supply side, the introduction of a new substitute product can also have an impact. If the substitute product is produced by the same firms, they may reallocate resources away from the production of the original product to the substitute. This would decrease the supply of the original product, shifting the supply curve to the left. However, if the substitute product is produced by new firms entering the market, the supply of the original product may remain unchanged.

The overall impact on market equilibrium depends on the relative shifts in demand and supply. If the decrease in demand is larger than the decrease in supply, the price of the original product will fall. If the decrease in supply is larger than the decrease in demand, the price of the original product may actually rise, despite the introduction of the substitute. However, in most cases, the introduction of a new substitute product is likely to lead to a decrease in both the price and quantity of the original product.

Furthermore, the elasticity of demand and supply also plays a crucial role. If demand for the original product is inelastic, the decrease in price will be smaller and the decrease in quantity larger. Conversely, if demand is elastic, the decrease in price will be larger and the decrease in quantity smaller. Similarly, the elasticity of supply determines how much the supply curve shifts in response to the introduction of the substitute product.

In conclusion, the introduction of a new substitute product can significantly shift market equilibrium. The exact impact depends on various factors, including the relative shifts in demand and supply and their elasticities.