When a restaurant that previously had no competition faces new competition, the elasticity of demand for its food will rise. In the context of the scenario that your image presents to us, your new demand curve will have to go through Point Y, not Point Z.
To understand why this is, we have to think about what will happen to the slope of your demand curve. The slope of a demand curve is determined by the price elasticity of demand for that product. Price elasticity of demand refers to how much the quantity demanded of the product changes when the price changes. If demand is elastic, a change in price leads to a greater change in quantity demanded. In graphic terms, what this means is that the more elastic the demand, the less steep the slope will be. This is because the shallower (less steep) slope means that the quantity of pizza changes more with any given change in price.
Now we have to figure out whether demand for Theresa’s pizza will become more or less elastic. Demand for a product becomes more elastic when there are more substitutes for that product. Your scenario specifies that the noodle and taco restaurants are acceptable substitutes for pizza. Therefore, demand for the pizza will be more elastic and the demand curve will be less steep. A line that goes through Points A and Y will be shallower than one that goes through Points A and Z.
When a restaurant gets more competition, the elasticity of the demand for its food rises. This is represented on your graph by a line that goes through Points A and Y.
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