How Substitutes and Complements Goods Affect Demand Curve

Table of Contents

In this article, we’re going to discuss substitutes and complements in economics. The idea behind substitutes and complements is that a change in the price of one good can actually affect demand for a different good and it depends on whether the two goods are substitutes or complements. So, for example, let’s take a bus ticket and we’re thinking about a bus to get you a trip but you could also take a train, right? You could also get a train ticket so if we’re thinking about the demand for bus tickets and there’s an increase in the price of train tickets so then people will say, “Okay, well train tickets are increasing in price, I’m going to increase my demand for bus tickets. I’d rather ride the bus because the Train is getting more expensive.” 

So if we have the increase in the price of a substitute that will increase demand for something like the bus ticket. Now if there’s a decrease in the price of a substitute, let’s say the train tickets actually became cheaper then that’s going to decrease demand for the other good in this case a decreased demand for a bus ticket. 

Now a complement good is kind of like the opposite, it’s two things that you would normally consume together, for example, you might think about spaghetti and pasta sauce. So you’re going to have pasta and you’re then going to have sauce and you’re usually going to have them together. You’re not just going to have one, you’re going to have the two of them in combination. 

So if the price of pasta sauce were to increase that would decrease demand for pasta/spaghetti. Think about it, if you went to the store and pasta sauce had tripled in price you would probably buy less pasta, and then the opposite is also true, if pasta sauce were to become a lot cheaper then you would actually increase your demand for pasta because you’re buying the two of them together, they complement goods.

I want to sketch out the graph for you, the demand curve just to show you how this would work. So let’s take a couple Goods here let’s think first about Coal and then we’ll think about the demand for Peanut Butter but let’s think about the demand for Coal.
So what happens if the price of natural gas were to decrease? Well, natural gas and coal can both be used to heat people’s homes, so they are substitutes. So natural gas is a substitute for coal if natural gas suddenly becomes a lot cheaper that is going to decrease the demand for coal. So what’s going to happen? As natural gas becomes cheaper so people start heating their homes with natural gas instead of coal so the demand curve for coal is going to shift to the left. There’s going to be a decrease in demand for coal.

Now let’s think about peanut butter in the U.S. I don’t know about your country but in the United States, peanut butter and jelly are commonly consumed together on a sandwich. We’d have a sandwich called the PB&J sandwich, peanut butter, and jelly sandwich. It’s a very common thing that people eat particularly kids, so if we think about the demand for peanut butter and we say that there is a decrease in the price of jelly, if parents are going to the store they’re looking for something to buy for their kids’ lunch and they say, “Wow, jelly got a lot cheaper.” Well, what is that going to do to the demand for peanut butter? Because they normally buy these together they buy peanut butter and jelly at the same time if jelly gets a lot cheaper that’s actually going to increase demand for peanut butter. 

So we see that the demand curve would actually shift to the right for peanut butter. We’d have a new demand curve here D2. So we see that as this is a complement good so we would say that jelly is a complement to peanut butter because people consume them together. So we see that the price of a related good whether it be natural-gas related to coal or how jelly is related to peanut butter or pasta and pasta sauce the price of one good when that changes that can actually affect the demand for an entirely different good.

Leave a Reply


Signup our newsletter to get update information, news, insight or promotions.

Latest Post