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How do substitutes and complements differ in economics?

Question:

How do substitutes and complements differ in economics?

Substitute and Complementary Goods:

Two goods are said to be substitutes of the consumption of one good can be substituted for the other. For example, tea and coffee. On the other hand, two goods are said to be complementary if they are only useful when used together. For example, the right shoe and the left shoe, car and tires.

Answer and Explanation:

We can differentiate substitute goods and complementary goods by the use of the cross-price elasticity of demand. The cross-price elasticity of demand measures the change in the quantity demanded due to a change in the price of another related product.

For substitute goods, the cross-price elasticity of demand is positive. The increase in the price one product increases the demand for a substitute good.

For complementary goods, the cross-price elasticity of demand is negative. Since complementary goods are consumed together, a fall in the price of one good increases its demand and thus, the demand for the other good increases as well.


Learn more about this topic:

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Cross Price Elasticity of Demand: Definition and Formula

from Economics 101: Principles of Microeconomics

Chapter 2 / Lesson 12
86K

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