Explain how the demand for a good is affected by the prices of its related goods. Give examples.
Quantity demanded of a good depends on the price of other goods (i.e. related goods). Any two goods are considered to be related to each other, when the demand for one good changes in response to the change in the price of the other good. The related goods can be classified into following two categories.
- Substitute Goods: These are the goods that can be consumed in place of each other. In other words, they can be substituted for each other. In case of substitute goods, if the price of one good increase, then the consumer shifts his demand to the other (substitute) good i.e. rise in the price of one good results in a rise in the demand of the other good and vice-versa. For example, tea and coffee are substitute goods. If, the price of tea rises (falls), the demand for coffee rises (falls).
- Complementary goods: These are the goods that are consumed together. It is the joint consumption of these goods that satisfies wants of the consumer. In case of complementary goods, if the price of one good increases then a consumer reduces his demand for the complementary good as well. That is, a rise in the price of one good results in a fall in the demand of the other good and vice-versa. For example, sugar and tea are complimentary goods. If, the price of tea increases (decreases), the demand for sugar decreases (increases).