Question

A Dell computer is a substitute for an HP" computer. What happens to the demand for HP computers and the quantity demanded of Dell computers as the price of a Dell falls (as a result of a change in supply)?

Short answer

As the price of Dell computers decreases, the quantity demanded of Dell computers increases while the demand for HP computers decreases.

Step-by-step solution

Understand the concept of 'substitute goods'

If two goods are substitutes, it means that they can be used in place of one another. Here, Dell and HP computers serve the same function and thus, are substitutes.

Initial impact of decrease in price of a substitute good

As the price of Dell computers decreases, they become more attractive to consumers. This causes a movement along the demand curve of Dell computers to a higher quantity demanded.

Impact on the demand for other good

As more consumers opt for cheaper Dell computers, the demand for the more expensive alternative, HP computers, will decrease. This causes a shift in the entire demand curve of HP computers to the left, indicating a decrease in demand at every price.

Resulting changes

The decrease in the price of Dell computers leads to an increase in their quantity demanded and a decrease in demand for HP computers.