The Indifference Curve for Substitutes & Complements in Economics

The Indifference Curve for Substitutes & Complements in Economics
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  • 0:01 Substitutes & Complements
  • 0:54 Visualizing Substitutes
  • 2:40 Visualizing Complements
  • 4:14 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Goods in a given economy do not exist in a vacuum. In this lesson, we will look at how substitutes and complements affect the indifference curve, helping economists figure out how prices ripple through the economy.

Substitutes and Complements

In economics, we talk a great deal about different types of goods and the quantities of these goods that are demanded, supplied, and manipulated. However, there is the very real fact that some goods have unique relationships with other goods. After all, when is the last time you bought hamburger buns without hamburgers? Speaking of hamburger buns, do you buy the store brand or the national brand, or does it even matter?

While it may sound rather trivial, this is all of great importance to economists. In fact, economists call any good that you purchase alongside something else, like hamburger buns and hamburgers, complementary goods because they are used together. Likewise, economists refer to any goods that could be used instead of another good, like store-brand buns over national-brand buns, substitute goods.

Visualizing Substitutes

Do you have a preferred brand of soft drink? Or maybe you prefer a specific type of tea? What about hamburger buns - is one brand really better than the rest? All of these are examples of substitute goods. Say you were going to the grocery store to pick up some soft drinks. The type that come in the red can are a dollar cheaper per case than their blue can competitors - which do you choose?

Assuming you don't really have a preference, you choose the cheaper option. By using an indifference curve, economists can visualize how you will choose. Perfect substitutes are those goods that price is the only difference between the two. For them, the line will be a perfectly straight line. Note that I didn't make any statement about the angle of the line, just that it would be straight.

First things first, this graph has three lines to help demonstrate that line shifts to the left or right maintain the same slope, meaning that there is no difference in proportional demand for good Y in terms of good X:

Indifference Curve for Substitutes
indifference curve for substitutes

Notice the x-axis and y-axis - both are for a given good. If you demand one unit of good Y, then you'd be happy to substitute that for roughly two units of good X. That may sound confusing, but think of the x-axis as six-packs of soft drinks, whereas the y-axis shows twelve-packs. That said, this graph does not make an inherent judgment of the quality of goods - if two brands of paper towels are being compared, a smaller quantity of higher-quality paper towels could replace a larger quantity of inferior ones. In any event, the underlying requirement is that the consumer would be just as happy with one given option as he or she would be with the other.

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