Question

With the help of a suitable example explain the effect of a rise in price on the demand for complementary goods.

Answer 1

Complementary goods are typically used together, meaning that the consumption of one good is closely linked to the consumption of another. When the price of one complementary good rises, the demand for both goods generally decreases.

Example: Cars and Gasoline

• Goods Involved: Consider cars and gasoline as complementary goods. Cars require gasoline to operate, so gasoline demand is closely tied to car demand.
• Scenario: Suppose the price of cars increases significantly due to new taxes or higher production costs.
• Impact on Demand:
  1. Decrease in Demand for Cars: As car prices increase, fewer people can afford to buy them. The quantity demanded for cars decreases because the higher price makes them less accessible to consumers.
  2. Decrease in Demand for Gasoline: Since fewer people are buying cars, gasoline demand also decreases. This is because people who don't buy cars don't need gasoline for cars they didn't purchase. Even current car owners might reduce their car usage to save on costs, further reducing gasoline demand.