Substitute and Complementary Goods

Substitute goods are those goods which can be used in place for other goods by the consumers to satisfy their needs and wants. Example of substitute goods can be of products which come in daily use like soaps, or toothpastes, or cold drinks. Since these goods can be used interchangeably as the price of one substitute rise consumers tend to switch to other products and therefore company’s producing substitute products have little pricing power because if they increase the price of their product, demand for their products reduces drastically offsetting any profit from rise in price.

There are some goods which are used together and as a result they are called complementary good. Complementary Goods refers to those goods where use of one good increases the use of other good. For example an increase in demand for X box will lead to increase in demand for games DVD s, or demand for petrol increases with rise in sales of automobiles. If the price of one good rises then not only its demand will fall but it will also bring down the demand for the other good because that good is dependent on the use of other good.

Thus in case of substitutes with rise in price of one good leads to increase in demand for other good and vice versa, while in case of complementary with rise in price of one good leads to decrease in demand for other good.

2 comments… add one

  • JOHN

    Great explanation, made things very clear. Thanks, this helped a lot.

  • siva

    Nice example

Leave a Comment