Question

Differences between substitute and complementary goods

Answer 1

Answer:

Explanation:

Complementary goods -

Here we have the demand curves for two complementary goods (A and B). Suppose the price good A goes down on the right panel. The law of demand tells us that more of good A will be purchased by moving down the demand curve. In other words, the quantity demanded for good A will increase.

Since goods A and B are complementary, more good A requires the use of more good B. But the price of good B has not changed. So more good B would be bought only if the demand for good B increases by shifting to the right.

A price increase in good A, on the other hand, will lead to a decrease in quantity demanded for good A and a decrease in demand for good B.

Substitute goods -

On the lower panels, we have two substitute goods (C and D). Suppose there is a price decrease in the price of good C on the right panel. The law of demand tells us that more of good C will be purchased by moving down the demand curve. In other words, the quantity demanded for good C will increase.

Since goods C and D are substitutes, more good C will replace the use of good D. But the price of good D has not changed. So less good D would be bought only if the demand for good D decreases by shifting to the left.

A price increase in good C, on the other hand, will lead to a decrease in quantity demanded for good C and an increase in demand for good D.