Substitute Goods

• In economics, one way two or more goods are classified is by examining the
relationship of the demand schedules when the price of one good changes.
This relationship between demand schedules leads to classification of goods
as either substitutes or complements. Substitute goods are goods which, as
a result of changed conditions, may replace each other in use (or
consumption).
• A substitute good, in contrast to a complementary good, is a good with a
positive cross elasticity of demand. This means a good's demand is
increased when the price of another good is increased.
• Conversely, the demand for a good is decreased when the price of another
good is decreased. If goods A and B are substitutes, an increase in the price
of A will result in a leftward movement along the demand curve of A and
cause the demand curve for B to shift out. A decrease in the price of A will
result in a rightward movement along the demand curve of A and cause the
demand curve for B to shift in.
Examples of
substitute
goods include
margarine and
butter, tea and
coffee.
 Complementary Goods
• In economics, a complementary good is a good with a negative
cross elasticity of demand, in contrast to a substitute good.
• This means a good's demand is increased when the price of
another good is decreased. Conversely, the demand for a good
is decreased when the price of another good is increased.
• If goods A and B are complements, an increase in the price of A
will result in a leftward movement along the demand curve of
A and cause the demand curve for B to shift in; less of each
good will be demanded.
• A decrease in price of A will result in a rightward movement
along the demand curve of A and cause the demand curve B to
shift outward; more of each good will be demanded.
 EXAMPLE
• An example of this would be the demand for hotdogs and hotdog buns. The
supply and demand of hotdogs is represented by the figure at the right with the
initial demand D1. Suppose that the initial price of hotdogs is represented by P1
with a quantity demanded of Q1. If the price of hotdog buns were to decrease
by some amount, this would result in a higher quantity of hotdogs demanded.
This higher quantity demanded would cause the demand curve to shift outward
to a new position D2. Assuming a constant supply S of hotdogs, the new quantity
demanded will be at D2 with a new price P2.
Other examples include:

1. Printers and ink cartridges

2. DVD players and DVDs
3. Computer hardware and computer software
4. Boots and laces
5. Torch and battery
 Complements and Substitutes
• Complements and substitutes illustrate the difference between changes in
quantity demanded vs changes in demand.
Introduction

• Two goods (A and B) are complementary if using more of good A requires

the use of more good B. For example, ink jet printer and ink cartridge are
complements.

• Two goods (C and D) are substitutes if using more of good C replaces the
use of good D. For example, Pepsi Cola and Coca Cola are substitutes.

• Complementary goods and substitute goods are good examples to illustrate

the difference between changes in demand vs changes in quantity
demanded.
 Complementary goods
• Here we have the demand curves for two complementary goods (A and
B). Suppose the price good A goes down on the right panel. The law of
demand tells us that more of good A will be purchased by moving
down the demand curve. In other words, the quantity demanded for
good A will increase.

• Since goods A and B are complementary, more good A requires the use
of more good B. But the price of good B has not changed. So more
good B would be bought only if the demand for good B increases by
shifting to the right.

• A price increase in good A, on the other hand, will lead to a decrease in

quantity demanded for good A and a decrease in demand for good B.
 Substitute goods
• On the lower panels, we have two substitute goods (C and D). Suppose
there is a price decrease in the price of good C on the right panel. The
law of demand tells us that more of good C will be purchased by
moving down the demand curve. In other words, the quantity
demanded for good C will increase.

• Since goods C and D are substitutes, more good C will replace the use
of good D. But the price of good D has not changed. So less good D
would be bought only if the demand for good D decreases by shifting
to the left.

• A price increase in good C, on the other hand, will lead to a decrease in

quantity demanded for good C and an increase in demand for good D.
 Summary
Complementary goods

• quantity demanded for good A up --> demand for good B up

• quantity demanded for good A down --> demand for good B
down

Substitute goods

• quantity demanded for good C up --> demand for good D down

• quantity demanded for good C down --> demand for good D up