Complements and Substitutes

Very few goods are bought in isolation. Some goods can stand in for each other, and economists call these substitutes - tea and coffee, buses and trains, one brand of rice and another. Other goods are used together, and economists call these complements - cars and petrol, phones and chargers, cricket bats and cricket balls. Because these related goods are linked in buyers’ minds, a change in the price of one can shift the demand for the other, even though the other good’s own price has not changed at all.

How substitutes affect each other

When the price of a good rises, people buy less of it, as the law of demand predicts. Some of those buyers switch to a substitute. So a rise in the price of one good causes demand for its substitute to increase - the whole demand for the substitute shifts outward, meaning more is wanted at every price. A fall in the price of a good does the opposite: it pulls buyers away from its substitutes, and demand for them decreases.

How strongly this happens depends on how close the substitutes are. Two brands of bottled water are very close substitutes, so a small price difference can move many buyers. A bicycle and a motor scooter are weaker substitutes: both get you around town, but they differ enough that a price change moves fewer people.

How complements affect each other

Complements work in the opposite direction. When the price of a good rises, people buy less of it, and since they use it together with its complement, they also buy less of the complement. A rise in the price of one good causes demand for its complement to decrease. A fall in price, on the other hand, increases demand for the complement. Some complements are very strongly linked, like a game console and the games made for it; others are only loosely linked, like bread and butter, which many people enjoy together but can also eat separately.

Movement or shift?

It is important to be precise about what changes. A change in the price of tea causes a movement along the demand curve for tea - people buy more or less tea as its own price changes. But the same change causes a shift of the entire demand for coffee, because something other than coffee’s own price has changed. This distinction, covered in the lesson on shifts versus movements, is what makes the idea of related goods so useful for predicting market outcomes.

Why it matters in the real world

Businesses think about complements and substitutes constantly. A company that sells printers cheaply may earn most of its profit on ink cartridges, a complement buyers must keep purchasing. A cinema may keep ticket prices modest because popcorn and drinks sold alongside them are profitable. Governments care too: a tax that raises the price of one fuel pushes buyers toward its substitutes, which may or may not be the outcome the policy intended.