I’ve been thinking about how the introduction of a new product, say a new substitute, impacts market demand. Intuitively I know that it would decrease demand and increase elasticity. I am curious about the equations.

When thinking about demand shifters and related goods we usually only consider their price in the demand equation because they already exist.

For example - before new entry - we g as the good in question, rg1 related good 1:

(1) Q = $100 - 2p_{g} + 2p_{rg1}$

After new entry, would the equation be something like:

(2) Q = $90 - 3p_{g} + 2p_{rg1} + p_{rg2}$

So, the constant falls and the own slope increases in magnitude. My questions are as follows: (1) For equation (1), can we think of the 100 as the amount consumed given what you consume of the related food? (2) Can we think of a given market demand as a sort of residual demand given the existing products in the market? This is similar to how we think of things with monopolistic competition. I was just wondering if it was implicitly the same for the market as a whole. Thanks.


1 Answer 1


I agree, in the real world all markets are residual. unlike the theory laboratory where a product is clearly distinct from all other products, in reality there are always substitutes, and there are fine lines between one product and another.


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