Market of a commodity is in equilibrium Price of complementary goods
'increases'. Explain the chain of effect of this change till the market again reaches
equilibrium. Use diagram.
Answers
Chain of Effects which may occur because of Increase in Price
Explanation:
Complementary goods are those goods which are often consumed together.
For example,Bread and Butter,car and diesel,etc.
If the Price of a commodity starts increasing or is higher than that of Market prices,then it may result in decrease in demand i.e there will be an excess of supply.
This is governed by the Law of Demand,i.e Price and Demand are inversely related which means that if one increases,the other one would decrease.
This sudden increase in supply will result in fall of prices of the goods which will result in increase in demand and contraction of excess supply.
Let's say,Goods "X" and "Y" are complement to each other. At some point in Market equilibrium,the price of Good "X" increases.This will result in less demand for Good "X" and its effect will reflect upon the demand of Good "Y" since both of them were complementary to each other.
The increase in price of Good "X" will cause the demand curve to shift leftwards and will cause the demand curve of Good "Y" to shift inwards.
This process will continue to happen back and forth until the previous market equilibrium is achieved.
Thus,the price of complementary goods will eventually fall back to Market equilibrium just through Market forces alone.
