Economics
Complementary Goods
Complementary goods are products that are used together to satisfy a particular need or want. The demand for one good is directly related to the demand for the other good. Examples of complementary goods include hot dogs and hot dog buns, or printers and ink cartridges.
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4 Key excerpts on "Complementary Goods"
- Berkeley Hill(Author)
- 2013(Publication Date)
- Pergamon(Publisher)
An example is butter and margarine. When the price of butter rises, consumers will buy more margarine. Fig. 3.9 shows that a rise in the price of a competi- Demand and Supply 59 FIG. 3.9 Effect on the Demand Curve of a Price Rise of a Competitive Good I σ E o α> o Quantity of margarine demanded per week tive good shifts the demand curve of margarine (i.e. the curve showing quantities of margarine demanded at different prices of margarine) to the right. The sensitivity of demand for margarine to the price of competitive goods, called the Cross Elasticity of Demand, is given by the formula: PERCENTAGE CHANGE IN QUANTITY CROSS ELASTICITY OF = OF GOOD A DEMANDED DEMAND FOR GOOD A ( E D x ) PERCENTAGE CHANGE IN PRICE OF GOODB The actual figure for butter and margarine is about 4- 0.23 The ^Όχ of competitive goods is positive, since a rise in price of one will cause more of the other to be bought. (ii) Complementary Goods: Complementary Goods are those which are usually used together. An example is oil and petrol for cars. If more petrol is bought in any one year, more oil is also bought because cars use both together. Such goods are sometimes called Joint Demand goods. If the price of petrol rises but that of oil is unaltered, not only will less petrol be bought but less oil too. Cross elasticities of joint demand goods are negative. The effect on the demand curve for oil of a rise in the price of petrol is to shift it to the left, as in Fig. 3.10. There is a link between the cross elasticity of demand between two competitive goods and the price elasticities of demand of each good. Goods which are sensitive to prices of competitors will also tend to have Movement to right caused by a rise in the price of butter 60 An Introduction to Economics for Students of Agriculture FIG. 3.10 Effect on the Demand Curve of a Price Rise of a Complementary Good Ö *o <υ o Quantity of oil demanded per week shallow demand curves i.e.
eBook - PDFMicroeconomic Theory
Basic Principles and Extensions
- Walter Nicholson, Christopher Snyder(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
But he refers explicitly only to two “properties” in his written summary of his results. Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-300 190 Part 2: Choice and Demand We can put this result into elasticity terms by dividing Equation 6.25 by x i : e c i 1 1 e c i 2 1 c 1 e c in 5 0. (6.26) But we know that e c ii # 0 because of the negativity of the own-substitution effect. Hence it must be the case that a j 2 i e c ij $ 0 . (6.27) In words, the sum of all the compensated cross-price elasticities for a particular good must be positive (or zero). This is the sense that “most” goods are substitutes. Empirical evidence seems generally consistent with this theoretical finding: Instances of net complementarity between goods are encountered relatively infrequently in empirical studies of demand. 6.5 COMPOSITE COMMODITIES Our discussion in the previous section showed that the demand relationships among goods can be complicated. In the most general case, an individual who consumes n goods will have demand functions that reflect n 1 n 1 1 2 /2 different substitution effects. 4 When n is large (as it surely is for all the specific goods that individuals actually consume), this general case can be unmanageable. It is often far more convenient to group goods into larger aggregates such as food, clothing, shelter, and so forth. At the most extreme level of aggregates, we might wish to examine one specific good (say, gasoline), which we might call x , and its relationship to “all other goods,” which we might call y . This is the procedure we have been using in some of our two-dimensional graphs, and we will continue to do so at many other places in this book. In this section we show the conditions under which this procedure can be defended. In the Extensions to this chapter, we explore more general issues involved in aggregating goods into larger groupings.
eBook - PDF- Steven Landsburg(Author)
- 2013(Publication Date)
- Cengage Learning EMEA(Publisher)
Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. demand. But if X is coffee and Y is cream, a 1% increase in the price of cream is likely to lead to a decrease (that is, a negative percentage change) in your coffee consumption and so in this case the cross elasticity of demand is negative. When the cross elasticity of demand for X with respect to Y is positive, we say that X and Y are substitutes . When it is negative, we say that they are complements . Substitutes, as the name indicates, tend to be goods that can be substituted for each other, as in our example of tea and coffee. Other examples might be Coke and Pepsi, or train tickets and airline tickets. Complements tend to be goods that are used together — each complements the other. We have seen the example of coffee and cream. Other pairs of complements might be computers and software, or textbooks and college courses. Example: Is Coke the Same as Pepsi? Coke is quite a good substitute for Pepsi; we know this because the cross elasticity of demand 4 is a relatively large .34, that is, when the price of Pepsi rises 1%, sales of Coke rise a hefty .34%. That perhaps is not surprising. What ’ s more surprising is that (regular) Coke is an even better substitute for Diet Pepsi; here the cross elasticity of demand is an even larger .45. But Coke is above all a close substitute for Diet Coke where the cross-elasticity is an enormous 1.15. By and large, Coke and Pepsi are good substitutes for most other soft drinks. When the price of Mountain Dew goes up, a lot of people switch to Pepsi (cross elasticity .77).
eBook - PDF- David Stager(Author)
- 2013(Publication Date)
- Butterworth-Heinemann(Publisher)
A change in quantity demanded is the result of a change in price with all other factors held constant; a change in demand is the result of a change in one or more other factors that influence con-sumers' purchases. 'Other factors are the prices of related com-modities, the consumers' income level, and the consumers' set of tastes or preferences. 4. The total market demand for a commodity is found by adding the quantity demanded at each price by each consumer in the market. 5. The elasticity of demand for a good, with respect to price, is de-fined as the percentage change in quantity demanded divided by the percentage change in price. When £ ^ < 1, demand is inelastic; when £ ^ > 1, demand is elastic; and when £ ^ = 1, demand is of unitary elasticity. When total revenue increases as price increases, the demand is inelastic; but if total revenue falls, the demand is elastic. When total revenue is unchanged as price changes, demand is of unitary elasticity. 6. Income elasticity is the percentage change in quantity demanded divided by the percentage change in income. If the quantity de-manded increases as income increases, or if the income elasticity is positive, the commodity is a normal good. Negative income elas-ticity indicates an inferior good. market and the labour market, with further consequences working their way through all other markets. Similarly, consumers may decide they would be happier if they attended more movies and bought fewer clothes. Again the consequences would ripple through a succession of markets. Thus, the concept of general equilibrium is of more practical significance in its explanation of the adjustment process of interdepen-dent markets and for its prediction of the direction in which the econ-omy will move than for the determination of prices and quantities that will actually exist at any time.
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