Transcript Substitute and Complementary goods 2.2 Elasticity

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
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
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
S2
Price
S1
f
P2
e
P1
D
Q2
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Quantity
Graph 2 – Increase in demand of good
B
S
Price
f
P2
e
P1
D2
D1
Q1
Q2
Quantity
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
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
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
S2
Price
S1
f
P2
e
P1
D
Q2
Q1
Quantity
Graph 4 – Decrease in demand of good
D
S
Price
f
P1
e
P2
D1
D2
Q2
Q1
Quantity