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(iv) Prices of Related goods

Substitutes Complements

•When the price of a substitute/complement to

good X changes,
•demand for good X changes too.

•It is reflected by a shift in the demand curve of

good X.
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Price of related goods-substitutes
Two goods are substitutes when one good can
be consumed in place of the other (goods in
competitive demand).
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Price of related goods-substitutes
Suppose price of Coca-cola rises from P0 to P1.
• This leads to a decrease in quantity demanded for Coca- Price
cola, from Q0 to Q1
• This results in an upward movement along the demand P1
curve for Coca-cola
P0
D1
How does it affect the demand for Pepsi? 0 Q1 Q0 Quantity
• Price of Pepsi remains unchanged
Figure 6a) Coca Cola
• Consumers will find Coca-cola relatively more expensive Price
than Pepsi
• and hence switch to drinking Pepsi as they are substitutes
• Thus at price P2, quantity demanded of Pepsi will
increase from Q2 to Q3. P2
• The increase in quantity demanded for Pepsi will take
place at each and every price level increase in demand
D2 D3
for Pepsi
• Reflected by the rightward shift of Pepsi’s demand curve 0 Q2 Q3 Quantity
from D2 to D3. Figure 6b) Pepsi
 Price of related goods-substitutes

The demand for a The demand for a

good increases when good decreases when
the price of its the price of its
substitute rises, substitute falls,
ceteris paribus. ceteris paribus

Positive relationship
between demand of
a good and the
price of its
substitute
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Price of related goods-complements

Complement is a good that is used in
conjunction with another good/ goods in joint
demand)
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Price of related goods-complements
Figure 7a) Cars
If price of car rises from P0 to P1, consumers will tend to
buy fewer cars. Price
• This leads to a decrease in quantity demanded for cars
fro Q0 to Q1
P1
• This results in an upward movement along the demand
curve for cars. P0

How does it affect demand for petrol? D1

• Although price of petrol remains unchanged, 0
Q1 Q0 Quantity
• consumers who are buying fewer cars will also consume
less petrol, since petrol is used in conjunction with cars
Price
Figure 7b) Petrol
(complements)
• Thus at P2, the quantity demanded for petrol will fall P2
from Q2 to Q3.
• The fall in quantity demanded will take place at each D3 D2
and every price level  fall in DD for petrol
• leftward shift of demand curve from D2 to D3. 0 Q3 Q2 Quantity
 Price of related goods-complements

The demand for a The demand for a good

good increases when decreases when the
the price of its price of complement
complement falls, increases, ceteris
ceteris paribus. paribus.
Inverse relationship
between demand of
a good and the
price of its
complement
 (iv) Price of Related goods
Substitutes Complements
Test Competitive DD E.g. Joint DD – consumed in
yourself Samsung Galaxy S10/Iphone 11 conjunction with another
good Eg: cars and petrol

When price of Samsung S10 ↓, When price of cars↓,

Consumers switch away from Consumers will buy more cars,
buying Iphone 11 to Samsung in turn consuming more
S10, petrol,
thus DD for Iphone 11 falls Thus DD for petrol rises

What happens to DD for What happens to DD for

iphone 11? petrol?
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(v) Taste & Preference

• Tastes are influenced by factors such as advertising, fashion trends,
education, health considerations, culture, religion and habit.

I’m more health conscious. Taste and preference change

Therefore, I would prefer
to drink low-fat milk than
full cream milk. How would
it affect demand for low-fat
milk?
in favour of low fat milk,
against that of full cream
milk  increase DD for low-
fat milk  rightward shift of
DD curve
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Changes in quantity demanded versus
(v)in
changes Taste & Preference
demand
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(vi) Weather
• Demand for products such as electricity and gas is
affected by weather.
• Very warm and very cold temperatures especially for
prolonged periods can dramatically increase the demand
for electricity for cooling and heating respectively.
• Winter  Increase in demand for winter wear and fall in
demand for light clothing
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(vii) Interest rates

Terms of credit, such as interest rates and availability of
credit affect the demand for goods, especially for big ticket
items such as cars and properties.

If interest rates for housing loans are raised

 cost of borrowing increase
 less affordable to purchase houses
 demand for houses falls
 Leftward shift of demand curve
If there is greater availability of credit or ease of
getting credit, it is easier to spend on
consumer durables such as cars
 demand for consumer durables increases
 Rightward shift of demand curve
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(viii) Population/Demographic changes
Changes in size of population
• An increase in size of population can lead to an increase in the demand for
basic necessities such as food items, housing and transport. Example:

• Rapid increase in population in economies like China and India

• huge increase in the demand for basic necessities such as food and
clothing
• rightward shift of DD curve

• Increase in foreign immigrants in Singapore

• leads to an increase in demand for housing and transport
• rightward shift of DD curve
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(viii) Population/Demographic changes

b) Changes in structure of In 2050, we are projected to

population have a lot more residents above
the age of 50.
• Structure of population refers Ageing population  increase
to the composition of the in demand for services like
population in terms of nursing homes and healthcare
sociological and demographic  rightward shift of DD curve
factors such as age, sex,
marital status, health,
education, social class, place of
residence (rural or urban),
moral and religious value
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(ix) Exchange rates (ER)
• Exchange rate is the current market price at which one currency can be exchanged
for another.
• If Singapore Dollars (SGD) appreciates against the Malaysian Ringgit (RM),
• it means that SGD1 can be exchanged for a larger amount of RM
• purchase of goods and services in Malaysia will become relatively cheaper for
Singaporeans.
Before SGD After SGD e.g. P of seafood dinner = RM$300
Appreciation Appreciation Before SG appreciation, seafood dinner = S$150
SGD 1= RM 2 SGD 1= RM 3.00 After SGD appreciation, seafood dinner = S$100

Singaporeans demand for holidays and

goods and services in Malaysia will
increase  rightward shift of demand
curve
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3.7 Derived demand
• Derived demand is where the demand for a factor of E.g Steel and car
production depends on the demand for the good that uses it. Steel is a derived
demand as steel is
used as a factor
input to produce cars

When the economy goes Fall in •Fall in derived

into a recession demand for demand for steel
 fall in income and new vehicles used as a FOP to
purchasing power produce cars
 fall in demand for  demand curve
normal goods such as for steel shifts
new cars leftwards
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DETERMINANTS OF DEMAND
Non-price determinants of Demand (EGYPTWIPE):
Price of the i Expectations of future Non-pricepricesdeterminants
good itself ii Government regulation
(excluding indirect taxes / subsidies)
Expectations of iii Income of households (Y)
∆ Qty Demanded Price of Taste & Interest Exchange
future prices iv Income
Prices ofrelated
related
goods
goods - substitutes
Preference Rate& complements
Rate
Government v Taste and preference
regulation Population
vi Weather Weather
changes
Normal
goods
vii Interest
Inferior goodsrate

viii Population/ demographic change(s)

Substitutes Complements
Movement ix Exchange rate
along DD curve
∆ Demand

Shift of DD curve