Question

Explain substitute goods and complementary goods and their impact on demand.

Answer 1

1. Substitute goods:

• Goods which can be easily used in place of one another are called substitute goods.
• Such goods have similar characteristics. They can be used in place of each other to satisfy the want.
• In this sense we can also say that substitute goods severely compete with each other.

Example:

• Very closely competing brands of soft drink such as Coke and Pepsi, televisions such as Sony and Samsung or motorcycles such as Honda and Bajaj, pure ghee and vanaspati ghee, etc. are. substitute of one another.
• If the price of a substitute good falls then the consumer may choose to replace hia current brand with the substitute which has become cheaper. Hence, demand for a good falls when price of its substitute falls.

2. Complementary goods:

• Complementary goods ard goods which are consumed together.
• This means one good cannot be consumed without the other. Complimentary goods must be consumed jointly to satisfy the want/need.

Example:

• Mobile phone and SIM card, air conditioner and electricity, spectacle frame and spectacle glasses, etc.
• If the price of complementary good rises, the demand for the original good falls and vice-versa.
• Since complimentary goods are jointly consumed, price rise in even one of these goods makes the joint consumption expensive and so the consumer demands lesser of both and vice-versa.