Show Solution : When price of complementary goods increases, keeping other tactors constant, then demand for the given commodity decreases since it becomes relatively expensive to consume the two commodities (the given commodity and its complement) together. It will lead to excess supply. This leads to competition among sellers, which reduces the price. Fall in price leads to decrease in supply and rise in demand. These changes continue till supply and demand become equal at a new equilibrium price. As there is a decrease in demand only, both equilibrium price and equilibrium quantity will fall. Refer 'Decrease in Demand' given in Section 11.5 for diagrammatic explanation. What happens to equilibrium quantity when price of complement increases?The prices of complementary or substitute goods also shift the demand curve. When the price of a good that complements a good decreases, then the quantity demanded of one increases and the demand for the other increases.
What happens to price and quantity when price increases?An increase in price almost always leads to an increase in the quantity supplied of that good or service, while a decrease in price will decrease the quantity supplied.
What will be the effect on equilibrium price and equilibrium quantity?An increase in demand and a decrease in supply will cause an increase in equilibrium price, but the effect on equilibrium quantity cannot be detennined. 1. For any quantity, consumers now place a higher value on the good,and producers must have a higher price in order to supply the good; therefore, price will increase.
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What is the impact on equilibrium price and quantity if an increase in the price of a complementary commodity?
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