Sunday, 3 April 2011

Complimentary and Substitute Goods (Microeconomics)

Complimentary and substitute goods are two different types of product which affect the demand for other goods...

Firstly, substitute goods. These, as the name suggests, are goods that can be classed as a substitute for another good. They occur when a good or service faces competition from another product. I could reel off a list of hundreds of substitute goods, but ill keep it short:
  • A holiday in Spain could be seen as a substitute for a holiday in the South of France.
  • A Ferrari could be seen as a substitute for a Lamborghini.
  • A meal at an Italian could be a substitute for a meal at a Chinese restaurant.

There is a relationship between the price of one product and the demand for its substitute. If the price of a good increases, then it is more than likely the demand for the substitute will increase as well as more consumers will move to purchasing it. It works both ways too, the price of a good decreases then you'd expect the demand for its substitute to also decrease as more consumers are attracted to the lower priced good.

Now complimentary goods. These are goods that tend to be jointly demanded, goods that go together is probably a better definition. Some examples of these would be:
  • Cars and petrol.
  • DVDs and DVD players.
  • Laptops and laptop carry-bags.

In these cases, there is also a relationship between the price of a good and the demand of its complimentary. Generally, if the price of a good goes up, then the demand for its complimentary good will fall as it becomes more expensive to buy them, thus discouraging consumers. Obviously, the other way round is the same... The price falls for a good then demand for the complimentary increase.

Tadaa.. That's all. Cheers.


  1. What happens to the price of the substitute good over time? I know the if the primary good increases price then the demand for the sub increases but what about it's price? Does it stay the same?

  2. Yep, the substitute good's price should increase as we'd see a shift in the demand curve for the substitute good (Refer to my post on demand for an explanation of that). A shift in demand means a higher equilibrium and therefore a higher price, so over time it may eventually reach or get close to the price of the initial primary good and then we could see demand shifting back to the first good. But in the short term, demand for the substitute good will rise and demand for the initial good will fall.


  3. what demand relationship exist between complimentary goods and how it is determined?

  4. what supply relationship exist between complimentary goods and how it is determined?

  5. Complimentary goods are goods that go hand in hand with one another. DVD players and DVDs, cars and petrol, fish and chips - those sort of things. So the demand relationship would be such that when the demand of one good rises the demand for the other will increase too.

    Why? Well, if demand for cars increased then there would be more cars on the road. Cars run on petrol, therefore this increase in cars will mean more petrol is demanded. The demand increase in one has caused an increase in demand of the other. They're linked.

  6. Supply is a bit different. They are generally being supplied by different firms. I.e firms that supply petrol don't produce cars as well. So, the supply relationship will depend on the make up of the firm and how they operate.

    You could argue that an increased demand would mean better profits for the firms supplying which could be reinvested back into the firm. This could lead to better, more efficient production methods and therefore an increase in supply.

    But, because different firms produce the goods and firms do not all act the same, the link between the supply of both goods is weaker.