What is the relationship between two goods when a price drop in one leads to a reduction in demand for the other_________?
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Answer: B. substitutes
Explanation
Substitute goods serve similar purposes so a price drop in one reduces demand for the other. Consumers switch to the cheaper alternative, abandoning the competing product. Negative cross-price elasticity characterizes substitute goods in microeconomic theory. Substitutes compete directly for consumer spending within the same product category. Cross-price elasticity of demand measures how price changes in one good affect another. Common examples include butter and margarine or rival smartphone brands.
Businesses monitor competitor pricing closely to protect their market share from substitutes. Antitrust authorities analyze substitute products to define relevant antitrust markets. Consumer choices shift rapidly when relative prices between substitutes change. Complements are goods consumed together where a price drop increases demand for both. Inferior goods experience lower demand when consumer incomes rise rather than prices drop. Normal goods see demand rise alongside increases in consumer income levels.
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