How does change in price of a complementary good affect the demand of the given good?

Read this article to learn about the effect of demand curve on substitute goods and complementary goods!

Substitute Goods:

Substitute goods are those goods which can be used in place of one another for satisfaction of a particular want, like tea and coffee. Demand for a given commodity varies directly with the price of a substitute good. For example, if price of a substitute good (say, coffee) increases, then demand for given commodity (say, tea) will rise as tea will become relatively cheaper in comparison to coffee. Let us clear this with the help of Fig. 3.10:

As seen in the given diagram, price of coffee (substitute good) is shown on the Y-axis and demand for tea (given commodity) on the X-axis. When price of coffee rises from OP to OP1, demand for tea also rises from OQ to OQ1.

Complementary Goods:

Complementary goods are those goods which are used together to satisfy a particular want. Demand for a given commodity varies inversely with the price of a complementary good. For example, if price of a complementary good (say, sugar) increases, then demand for given commodity (say, tea) will fall as it will be relatively costlier to use both the goods together. Let us understand this through Fig. 3.11:

As seen in the given diagram, price of sugar (complementary good) is shown on the Y-axis and demand for tea (given commodity) on the X-axis. When the price of sugar rises from OP to OP1, demand for tea falls from OQ to OQ1.

It must be noted that a demand curve shows the relationship between the quantity demanded of a given commodity and its price. So, Fig. 3.10 and Fig. 3.11 are not demand curves as they show the relationship between demand for the given commodity and price of a related good.

Demand is not affected by Change in Price of Unrelated Goods:

Demand for a commodity is affected by change in price of only related goods (substitute goods and complementary goods). Any change in the price of unrelated goods does not affect the demand for a given commodity. Unrelated goods refer to those goods which are not linked with the demand for a given commodity. For example, there will be no change in the demand for tea with a change in the price of Pen.

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Cross Demand:

Cross demand refers to the relationship between the demand of a given commodity and the price of related commodities, other things remaining the same. Cross demand indicates how much quantity of a given commodity will be demanded at different prices of a related commodity (substitute or complementary). It can be expressed as: Dx = f (Py)

{Where: Dx= Demand for the given commodity; f = Functional relationship; Py = Price of the related commodity (substitute or complementary).}

Cross Demand can be either Positive or Negative:

i. Cross demand is positive in case of substitute goods as demand for the given commodity varies directly with the prices of substitute goods.

ii. Cross demand is negative in case of complementary goods as demand for the given commodity varies inversely with the prices of complementary goods.

Cross Price Effect on Demand Curve:

Cross Price Effect refers to effect on the demand for a given commodity due to a change in the price of a related commodity. It means, cross price effect originates from substitute goods and complementary goods. Let us understand the effect on the demand curve of a given commodity when there is change in the prices of substitute and complementary goods.

Change in Prices of Substitute Goods:

A change (increase or decrease) in the price of substitutes directly affects the demand for a given commodity.

(i) Increase in Price of Substitute Goods:

When price of substitute goods (say, coffee) rises, demand for the given commodity (say, tea) also rises from OQ to OQ1 at its same price of OP. It leads to a rightward shift in the demand curve of the given commodity from DD to D1D1

(ii) Decrease in Price of Substitute Goods:

With decrease in price of substitute goods (coffee), demand for the given commodity (tea) also decreases from OQ to OQ1 at the same price of OP. It shifts the demand curve of the given commodity towards left from DD to D1D1.

Change in Price of Complementary Goods:

An increase or decrease in the prices of complementary goods inversely affects the demand for the given commodity.

(i) Increase in Price of Complementary Goods:

When price of complementary goods (say, sugar) rises, demand for the given commodity (say, tea) falls from OQ to OQ1 at the same price of OP. As a result, the demand curve of the given commodity shifts to the left from DD to D1D1.

(ii) Decrease in Price of Complementary Goods:

With decrease in price of complementary goods (sugar), demand for the given commodity (tea) increases from OQ to OQ1 at the same price of OP. As a result, the demand curve of the given commodity shifts to the right from DD to D1D1.