key term - Complementary Goods

Definition

Complementary goods are two or more products that are typically consumed together, where the demand for one good increases as the demand for the other good increases. These goods have a positive cross-price elasticity of demand, meaning that when the price of one good changes, the demand for the other good changes in the same direction.

5 Must Know Facts For Your Next Test

1. Complementary goods are often purchased and consumed together, such as coffee and cream, or a printer and its ink cartridges.
2. The demand for complementary goods is interdependent, meaning that a change in the price of one good will affect the demand for the other good.
3. If the price of one complementary good increases, the demand for the other good will decrease, as consumers will be less likely to purchase the pair.
4. The cross-price elasticity of demand for complementary goods is positive, indicating that a decrease in the price of one good will lead to an increase in the demand for the other good.
5. Identifying complementary goods is important for businesses to understand consumer behavior and make informed pricing decisions.

Review Questions

• Explain how the demand for complementary goods is interdependent and how a change in the price of one good affects the demand for the other good.
  • The demand for complementary goods is interdependent, meaning that a change in the price of one good will affect the demand for the other good. If the price of one complementary good increases, the demand for the other good will decrease, as consumers will be less likely to purchase the pair. Conversely, if the price of one complementary good decreases, the demand for the other good will increase, as consumers are more likely to purchase the pair. This relationship is captured by the positive cross-price elasticity of demand for complementary goods.
• Describe how the demand curve for complementary goods will shift in response to changes in the price of the related good.
  • The demand curve for complementary goods will shift in response to changes in the price of the related good. If the price of one complementary good decreases, the demand curve for the other good will shift to the right, indicating an increase in the quantity demanded at any given price. Conversely, if the price of one complementary good increases, the demand curve for the other good will shift to the left, indicating a decrease in the quantity demanded at any given price. This shift in the demand curve is a result of the interdependent nature of the demand for complementary goods.
• Analyze the importance of identifying complementary goods for businesses and how this knowledge can inform their pricing decisions.
  • Identifying complementary goods is important for businesses to understand consumer behavior and make informed pricing decisions. By recognizing that the demand for certain goods is interdependent, businesses can adjust the pricing of one good to influence the demand for the other. For example, if a business knows that printers and ink cartridges are complementary goods, they can strategically price the printer at a lower cost to increase the demand for the more profitable ink cartridges. This knowledge allows businesses to optimize their pricing and bundling strategies to maximize revenue and profitability, as well as better meet the needs of their customers.

Related terms

Cross-Price Elasticity of Demand:

The measure of how responsive the demand for one good is to a change in the price of another good. For complementary goods, the cross-price elasticity is positive, indicating that a decrease in the price of one good will increase the demand for the other good.

Substitute Goods:

Goods that can be used in place of one another, where an increase in the price of one good leads to an increase in the demand for the other good. Substitute goods have a negative cross-price elasticity of demand.

Demand Curve:

A graphical representation of the relationship between the quantity demanded of a good and its price, holding all other factors constant. The demand curve for complementary goods will shift in response to changes in the price of the related good.