How does increase in price of complementary goods affect the demand of the goods?

What are Complementary Goods?

A complementary good is one whose usage is directly related to another linked or associated good or a paired good, i.e., we can say two goods are complementary to each other. When the usage of good A enhances or requires the usage of another related good B or, in simpler terms, usage of good A drives the demand for the use of good B.

Inhaltsverzeichnis Show

• What are Complementary Goods?
• Short Description
• Complementary Goods Examples
• How Firms Use Complementary Goods?
• Complementary Goods vs. Substitute Goods
• Recommended Articles
• How does price of complementary goods affect demand?
• What happens when price of a complementary good increases?
• What is the effect on product A of an increase in the price of complementary product B?

Short Description

These are associated with or related to each other and are generally used in conjunction. The demand for one good drives the need for the other. It is generally observed that consumer goodsConsumer goods are the products purchased by the buyers for consumption and not for resale. Also referred to as final products, examples of consumer goods include an Apple cellphone or a box of Oreo cookies. Consumer goods companies and the industry offer a vast range of products that heavily contribute to the global economy.read more are of very little value when consumed or produced alone.

Thus the existence of two or more complementary goods is necessary to bring about the right balance. When consumed or produced together, it adds enhanced value to the offering. Two products are called complementary when each one shares a beneficial relation, for example, mobile phone and mobile cover. Both cannot exist alone, and thus each one plays a role in the value offering.

Complementary good, on the other hand, has a negative cross elasticity of demandCross Price Elasticity of Demand measures the relationship between price and demand. Change in quantity demanded by one product with a change in price of the second product, where if both products are substitutes, it will show a positive cross elasticity of demand.read more which means if the price of one product significantly increases, the demand for the related consumer goods tends to fall as due to increase of the price of one product, consumers will prefer using it alone and not complementing it with another good or product.

In addition to this, as consumer demand for such goods or products falls, the price in the market for the complementary goods or services also tends to decline.

Complementary Goods Examples

• One very common example is wine and wine glasses. A person buying a bottle of wine will always prefer to have the drink in a traditional wine glass, and thus both are interrelated to its consumers who take both the products as complementary goods.
• ·Another example of complementary goods is a torch and battery. A torch powered by batteries is useless unless we use the battery in it, and thus both products exist with the help of each other and are not worth it if each one of them is not produced or supplied in the market.
• Razor and blade can also be considered classic examples because a razor requires constant replacement of the blades with its usage over a certain period, and both products exist with the support of each other.

How Firms Use Complementary Goods?

As we know, complementary goods are related to each other, and each good is deemed useless without the usage or consumption of the other. Firms are very smart in designing their product, and thus marketing happens so that consumers are bound to shed money even when the company says that goods are available at a discount.

An example of this can be an instant camera, which is marketed by a few companies and is sold in the market for only $40. Consumers may think that a camera that provides a snap instantly at only $40 may be a good deal, but there is a catch to it.

The camera comes with an additional photo roll where the photo taken gets printed. The price of each photo roll, which can print 12-15 photos, is $20. So after every 12-15 photos, the consumers have to shell out $20.

It is where such companies are making use of complementary goods. One hand giving a product as cheap as $40, the complementary good that makes the camera usable is priced at a higher-end based on every use.

Demand

• It possesses a negative cross elasticity of demand where increasing the price of one good brings down the demand of the other. These are usually consumed together, and thus fluctuation in prices of complementary goods will generally shift the demand curveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.read more.
• When the price of one good decreases, the demand for its quantity increases, and thus the demand for the other also increases. When two products are complemented, they experience what we call a joint demand.
• For example, the demand for razor blades depends on the number of razors a consumer uses, which is why razors are being sold at a loss to increase the demand for the blades.

Complementary Goods vs. Substitute Goods

• Complementary goods are consumed together, whereas substitute goods are the ones that fulfill a common want. When a product price increases, the demand for complementary goods decreases, whereas the demand for the product’s substitute increases.
• Substitute goods are more like competitors in the markets, whereas complementary goods are more associated with products. An example of a substitute good can be Coke and Pepsi, whereas a complement good is the razor and the blades. Substitute goods have an inverse relationship, whereas complementary goods are positively associated with one another.

Recommended Articles

This has been a guide to What is Complementary Goods & its Definition. Here we discuss the examples of complementary goods and how firms use this along with graphs and demand. You can learn more about from the following articles –

• Elastic Demand
• Determinants of Demand
• Giffen Goods
• Veblen Goods