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Complementary Goods Definition
Complementary goods are products that are typically used together. They are goods that people tend to buy at the same time because they go well together or enhance each other's use. A good example of complementary goods would be tennis rackets and tennis balls. When the price of one good goes up, the demand for the other also goes down, and when the price of one good goes down, the demand for the other goes up.
Complementary goods are two or more goods typically consumed or used together, such that a change in the price or availability of one good affects the demand for the other good.
A good example of complementary goods would be video games and gaming consoles. People who buy gaming consoles are more likely to buy video games to play on them, and vice versa. When a new gaming console is released, the demand for compatible video games usually increases as well. Similarly, when a new popular video game is released, the demand for the gaming console it is compatible with may also increase.
What about a good whose consumption does not change when the price of other good changes? If price changes in two goods do not affect the consumption of either of the goods, economists say that the goods are independent goods.
Independent goods are two goods whose price changes do not influence the consumption of each other.
Complementary Goods Diagram
The complementary goods diagram shows the relationship between the price of one good and the quantity demanded of its complement. The price of Good A is plotted on the vertical axis, whereas the quantity demanded of Good B is plotted on the horizontal axis of the same diagram.
Fig. 1 - Graph for complementary goods
As Figure 1 below demonstrates, when we plot the price and quantity demanded of complementary goods against each other, we get a downward-sloping curve, which shows that the quantity demanded of a complementary good increases as the price of the initial good decreases. This means that consumers consume more of a complementary good when the price of one good decreases.
Effect of Price Change on Complementary Goods
The effect of price change on complementary is that the increase in the price of one good causes a decrease in demand for its complement. It is measured using cross price elasticity of demand.
Cross price elasticity of demand measures the percentage change in the quantity demanded of one good in response to a one percent change in the price of its complementary good.
It is calculated using the following formula:
\(Cross\ Price\ Elasticity\ of\ Demand=\frac{\%\Delta Q_D\ Good A}{\%\Delta P\ Good\ B}\)
- If the cross price elasticity is negative, it indicates that the two products are complements, and an increase in the price of one will lead to a decrease in the demand for the other.
- If the cross price elasticity is positive, it indicates that the two products are substitutes, and an increase in the price of one will lead to an increase in the demand for the other.
Let's say that the price of tennis rackets increases by 10%, and as a result, the demand for tennis balls decreases by 5%.
\(Cross\ Price\ Elasticity\ of\ Demand=\frac{-5\%}{10\%}=-0.5\)
The cross price elasticity of tennis balls with respect to tennis rackets would be -0.5, indicating that tennis balls are a complementary good for tennis rackets. When the price of tennis rackets increases, consumers are less likely to purchase balls, decreasing the demand for tennis balls.
Complementary Goods Examples
Examples of complementary goods include:
- Hot dogs and hot dog buns
- Chips and salsa
- Smartphones and protective cases
- Printer and ink cartridges
- Cereal and milk
- Laptops and laptop cases
To better understand the concept, analyze the example below.
A 20% increase in the price of fries causes a 10% decrease in the quantity demanded of ketchup. What is the cross-price elasticity of demand for fries and ketchup, and are they substitutes or complements?
Solution:
Using:
\(Cross\ Price\ Elasticity\ of\ Demand=\frac{\%\Delta Q_D\ Good A}{\%\Delta P\ Good\ B}\)
We have:
\(Cross\ Price\ Elasticity\ of\ Demand=\frac{-10\%}{20\%}\)
\(Cross\ Price\ Elasticity\ of\ Demand=-0.5\)
A negative cross-price elasticity of demand indicates that fries and ketchup are complementary goods.
Complementary Goods vs Substitute Goods
The main difference between complementary and substitute goods is that complements are consumed together whie substitute goods are consumed in place of each other. Let's break the differences down for better understanding.
| Substitutes | Complements |
| Consumed in place of each other | Consumed with each other |
| A price reduction in one good increases the demand for the other good. | A price increase in one good decreases demand for the other good. |
| Upward slope when the price of one good is plotted against the quantity demanded of the other good. | Downward slope when the price of one good is plotted against the quantity demanded of the other good. |
Complementary Goods - Key takeaways
- Complementary goods are products that are typically used together and influence each other's demand.
- The demand curve for complementary goods is downward sloping, indicating that an increase in the price of one good decreases the quantity demanded of the other good.
- The cross price elasticity of demand is used to measure the effect of price changes on complementary goods.
- A negative cross price elasticity means that the goods are complements, while a positive cross price elasticity means that they are substitutes.
- Examples of complementary goods include hot dogs and hot dog buns, smartphones and protective cases, printer and ink cartridges, cereal and milk, and laptops and laptop cases.
- The main difference between complementary and substitute goods is that complementary goods are consumed together while substitute goods are consumed in place of each other.
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Frequently Asked Questions about Complementary Goods
What are complementary goods?
Complementary goods are products that are typically used together and influence each other's demand. An increase in the price of one good decreases the quantity demanded of the other good.
How do complementary goods affect demand?
Complementary goods have a direct impact on the demand for each other. When the price of one complementary good increases, the demand for the other complementary good decreases, and vice versa. This is because the two goods are typically consumed or used together, and a change in the price or availability of one good affects the demand for the other good
Do complementary goods have derived demand?
Complementary goods do not have derived demand. Consider the case of coffee and coffee filters. These two goods are typically used together - coffee is brewed using a coffee maker and a coffee filter. If there is an increase in the demand for coffee, it will lead to an increase in the demand for coffee filters since more coffee will be brewed. However, coffee filters are not an input in the production of coffee; they are simply used in the consumption of coffee.
Are oil and natural gas complementary goods?
Oil and natural gas are often considered substitute goods rather than complementary goods because they can be used for similar purposes, such as heating. When the price of oil increases, consumers may switch to natural gas as a cheaper alternative and vice versa. Therefore, the cross-price elasticity of demand between oil and natural gas is likely to be positive, indicating that they are substitute goods.
What is the cross elasticity of demand for complementary goods?
The cross elasticity of demand for complementary goods is negative. This means that when the price of one good increases, the demand for the other good decreases. Conversely, when the price of one good decreases, the demand for the other good increases.
What is the difference between complementary goods and substitute goods?
The main difference between a substitute and a complement is that substitute goods are consumed in place of each other, whereas complements are consumed together.
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