Question

Nataliya is a fan of soy yoghurts, but recently she has noticed less soy yoghurts on supermarket shelves, with new alternative products such as almond milk yoghurt appearing in their place. What effect does the entrance of new firms have on the market for almond milk yoghurt? What effect does this have on the market for soy yoghurt? What does this tell us about the cross-price elasticity of demand for soy yoghurts? Do you think soy yoghurt and almond milk yoghurt are substitutes or complements in consumption and why? What effect do the new products have on the own-price elasticity of demand for soy yoghurts?

Answer 1

The effect of entrance of new products on the almond milk yogurt will be that people will now have more alternatives to choose from. Thus, if the other alternatives are offering lower price, consumers might go for those products. Its elastictity of demand has increased.

The similar effect can be observed for the the soy yogurt. People like Nataliya now have alternatives available with them. They will shift to other products, if they find soy yogurt too expensive. This will reduce the demand for soy yogurt. Similarly, people might choose soy yogurt when other products are more expensive. This will increase the demand for soy yoguts.

This tells us that due to availability of substitutes, the soy yogurt has a positive cross price elasticity of demand. In other words, the price of almomd milk yogurt will affect the demand for soy yogurt. More Price of almond milk raises the demand for soy yogurt and vice versa.

The cross price elasticity of soy yogurt and almond milk yogurt tells us that both are substitutes. This is because they have a positive cross price elasticity of demand. Rise in price of one will decrease the demand for other.

As discussed above, the new products will increase the own price elasticity of yogurt. This is because when there are substitutes available for a commodity, people can easily shift to those in case of price changes and this contributes to more own price elasticity of the commodity.