What happens to the market of Listerine mouthwash when the price of Scope mouthwash decreases assuming both are substitute products?
The correct answer and explanation is:
Correct Answer: The demand for Listerine mouthwash decreases.
Explanation:
When two products are substitutes, consumers see them as alternatives to each other. In this case, Listerine and Scope mouthwashes are substitute products. This means that if the price of one product changes, it directly affects the demand for the other.
If the price of Scope mouthwash decreases, it becomes more attractive to consumers compared to Listerine, assuming all other factors remain constant. More people are likely to buy Scope because it offers similar benefits at a lower price. As a result, fewer consumers will purchase Listerine. This causes the demand for Listerine to shift to the left on the demand curve, meaning a lower quantity is demanded at each price level.
This decrease in demand for Listerine can lead to several market outcomes. First, retailers may respond by lowering the price of Listerine to maintain sales levels and stay competitive. This could initiate a price competition between the two brands. Second, Listerine may invest in marketing, promotions, or product differentiation to regain consumer interest and loyalty. Alternatively, producers of Listerine might reduce production to match the lower demand, affecting supply levels in the market.
This interaction is a basic principle of microeconomics where the pricing of one substitute affects the market behavior of the other. It shows how consumer choice, influenced by price changes, can impact the broader market performance of related goods.
In summary, when the price of Scope mouthwash falls, the demand for its substitute, Listerine, also falls. This is due to consumers switching to the more affordable option, demonstrating the concept of substitute goods in market economics.