Question

How do the following affect the equilibrium price and quantity? Show graphically.

An increase in the price of complementary goods.

Answer 1

An increase in the price of complementary goods leads to a decrease in the demand for the given commodity since complementary goods are consumed together. For example, if the price of printers increases, the demand for ink cartridges may fall. This situation shifts the demand curve leftward, from D₀D₀ to D₂D₂, while the supply curve (SS) remains unchanged. Initially, the market is in equilibrium at point E₀ with price P₀ and quantity Q₀. After the decrease in demand, the new equilibrium is established at point E₂. As a result, the equilibrium price falls from P₀ to P₂, and the equilibrium quantity decreases from Q₀ to Q₂. Thus, when the price of complementary goods rises, both the equilibrium price and quantity of the related good decrease.