Page 108 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-6: Theory of Demand and Elasticity of Demand

2. Prices of Related Goods Notes

Demand of a commodity depends not only on its price but also on prices of related goods. Commodities
are classified by general phase in Substitute Goods and Complementary Goods.
(i) Substitute Goods: Substitute Goods are those which are used in place of each other as Tea and
Coffee or Pepsi Cola and Coca Cola. Price of Coca Cola is related to Price of Pepsi Cola. If Pepsi
Cola’s price increases, then people will demand more Coca Cola and If Pepsi Cola’s price decreases,
then Coca Cola’s Demand will decrease. In other words, about Substitute Goods Quantity Demanded
of a commodity is directly related the other or substitute goods. If commodity such as Coca Cola’s
price increases then its substitute like Pepsi Cola’s demand will increase. Inversely if Coca Cola’s price
decreases, its substitute Pepsi Cola’s demand will decrease. By Fig. 6.4 we can see this relation—

Fig. 6.4

Y
D
P 1 Demand for
Price of Pepsi P
substitutes

O D X
Q Q
1
Demand for Coke

Figure 6.4 shows that an increasing rate of Pepsi Cola from OP to OP demand of Coca Cola
1
increased by OQ to OQ .
1
(ii) Complementary Goods: Complementary Goods are those goods which are used together and
whose usability depend upon each other such as Car and Petrol, Pen and Ink. Complementary
Goods, prices and Demands are inversely or negatively related. Complementary goods such
as pen its increasing rate decreases the demand of Ink (with the pen’s demand). Inversely on
decreasing rate of pen, ink’s demand increases. In other words, if two goods are complementary
of each other and if one’s price increases the other complementary good’s demand will increase.
Inversely, if one’s price decreases, then the other complementary good’s demand will increase.
It can be shown clearly by Fig. 6.5.
Fig. 6.5

Y
D
P 1 B Demand for
Price of Pens P A goods D
complementary

O X
Q Q
1
Demand for Ink
Figure. 6.5 shows ink’s demand is decreased from OQ to OQ to increase in price of pens.
1
So in the case of Substitute goods, curve is positively sloped whereas in the case of Complementary
goods curve is negatively sloped.

LOVELY PROFESSIONAL UNIVERSITY 101