Substitute and Complementary goods 2.2 Elasticity Hyun Bin Lee

Definition of the substitute goods A pair of goods which are considered by consumers to be alternatives to each other. As the price of one goes up, the demand for the other rises. (Sloman) A good or service that may be used in place of another (Glanville)

Producer? Consumer? According to the Glanville, there are two types of substitute goods. One is substitute producer goods and the other is substitute consumer goods. Substitute producer goods are alternative goods that the seller might supply. eg) If there is a sharp decline in price of grapes due to an excess supply, the suppliers try to reallocate resources by replacing production of grapes to that of other goods such as rice and wheat. Substitute consumer goods are the ones which fit to the Sloman’s definition. eg) Pepsi and Coca Cola

Price relationship between consumer substitute goods When two goods are a pair of substitute goods, the price of one good is proportional to the demand of the other good. In other words, when the price of one good increases, then the demand of the other good also increases and vise versa, because consumers want to buy cheaper goods. The closer the characteristics of the substitute goods, the bigger the change in demand of one good will occur when the price change of the other good occurs.

Graph1 – Increase in price of good A Q1 Q2 P1 P2 Quantity Price e f

Graph 2 – Increase in demand of good B Q2 Q1 P1 P2 Quantity Price e f D2

Definition of the complementary goods A pair of goods consumed together. As the price of one goes up, the demand for both goods will fall. (Sloman) Two goods are considered complements if a change in the price of one causes an opposite shirt in the demand for the other. For example, if the price of computers goes up, the demand for computer games will fall; if the price of computers goes down, the demand for computer games will increase. (Glanville)

Price relationship between complementary goods As explained from Glanville’s definition, a change in the price of one causes an opposite shirt in the demand for the other. The closer the relationship between complementary goods, the stronger the impact of one good’s price change to the demand of the other.

Graph 3 – Increase in price of good C Q1 Q2 P1 P2 Quantity Price e f

Graph 4 – Decrease in demand of good D Q1 Q2 P2 P1 Quantity Price e f D1