What is the difference between substitute and complementary goods

Substitute goods are those which can be used in place of each other for the satisfaction of some want e. There is a direct relationship between the price of substitute goods and given commodity, other things remain constant and vice versa.

It implies as the price of substitute goods increases, the quantity demanded of a given commodity starts increasing. For example, If the price of coke increases, it will result in more Qd for Limca as Limca will become cheaper as compared to coke. Thus the price of substitute goods directly affects the Qd for the given commodity. Complementary goods are those which are used together to satisfy a specific need such as cars and petrol, shoes and polish, pencils and erasers, etc.

It implies that as the price of complementary goods rises, the quantity demanded of the given commodity starts declining, other things being constant and vice versa. For example, as the price of shoes starts increasing, the quantity demanded of polish starts decreasing as they will become expensive when used together. So, the demand for a given commodity is inversely affected by the price of complementary goods. Basis of Difference. Price-Demand Relationship.

Degree of Cross Elasticity. Price Effect. The extent to which two products are substitutes or complements can be measured by calculating their mutual cross elasticity of demand.

The cross elasticity of demand measures the percentage change in quantity demanded of the product that occurs in response a percentage change in price of a substitute good.

If the cross elasticity of demand is positive, the products are substitute goods. On the other hand, if cross elasticity is negative, the products are complements. The following chart shows what happens to demand for two substitute goods, iPhone and Galaxy S, when the price of Galaxy S changes.

In response, the demand curve for iPhone shifts outward, i. You are welcome to learn a range of topics from accounting, economics, finance and more. Report Error Is there an error in this question or solution? Share 0. Select a course. My Profile. My Profile [view full profile]. Inform you about time table of exam. Inform you about new question papers. New video tutorials information.