In microeconomics goods are classified in two types SUBSTITUTE GOODS and COMPLEMENTARY GOODS
The concept of both these goods is widely used by both consumers and producers. The concept also helps the producer to recognize what should be produced by the firm. The concept also plays a crucial role when DEMAND is analyzed.
According to microeconomics two goods are substitutes if both the products could be used to fulfill the same purpose by the consumers.
In other words, we can understand it by saying that the products involved happen to give the same satisfaction to the consumer. Both the goods are comparable and similar and cause the consumer to desire less of the other good if he has more of the first good.
CROSS ELASTICITY OF DEMAND
The fact that one good is substitutable for the other has immediate economic consequences, as the demands for the two goods will be interrelated by the fact that the consumer can trade off one good for the other if it becomes advantageous when compared.
For example : Suppose there are two goods A & B , both are substitutes of each other. So if the price of “A” increases the customer tends to purchase it less and will find a replacement that will be “B” and so the demand for the product “B” will rise and vise-versa.
TYPES OF SUBSTITUTE GOODS
· Perfect substitute : Perfect substitutes exist when the consumer is able to use both the goods in exactly the same way.
For example – Butter from two different producers, the manufacturer may differ but their purpose and usage is the same.
· Imperfect substitutes : Imperfect substitutes are also called as ‘CLOSE SUBSTITUTES” , they have lesser level of substitutability and therefore exhibit variable marginal rates of substitution.
For example : Different types of pulses are substitutes of each other , tea & coffee etc.
A complementary good/service is an item which is used in conjunction with another good / service.
Usually, the complementary good/service consumed alone has little or no value , but when combined with another good/service it adds to the overall value of the offering.
A product can be said as a complement one when it shares its beneficial relationship with other offerings as well.
For example – iPhone and the apps used with it.
NEGATIVE CROSS-ELASTICITY OF DEMAND
The combined demand nature of complementary goods leads to an interplay between the consumer need for the second product as the price of the first product fluctuates.
This is the concept of “Negative Cross Elasticity” , when the price of one product rises , the demand for the complement good falls as the consumer is rarely interested in using the complementary good/ service alone.
TYPES OF COMPLEMENTARY GOODS
· Weak Complementary Goods– These types of goods have a low cross-elasticity of demand.
For example : If the value of coffee rises in the market, it will have only a marginal impact on reducing the intake of cream by the public.
· Strong Complementary Goods – These types of goods have high cross-elasticity of demand.
For example :If the value of petrol/diesel rises the consumption of vehicles will automatically fall.
COMPLEMENTARY GOODS VS SUBSTITUTE GOODS
|COMPLEMENTARY GOODS||SUBSTITUTE GOODS|
|· These are those goods that are jointly required to satisfy a particular want.||· These are those goods which are used in place of one another to satisfy a want.|
|· In the case of complementary goods, when the price of one commodity falls then the demand for its complementary goods will rise.||· In the case of substitute goods, if the price of one commodity increases, then the demand for its substitute will increase.|
|· In case of complementary goods when the price of one commodity increases then the demand of its complementary will decrease.||· In case of substitute goods when the price of one commodity decreases, then the demand of its substitutes will also decrease.|
|· Example – Tea & Sugar , Ink & Pen , Ink printer & Paper etc.||· Example- Tea & Coffee , Colgate & Pepsodent , Cello pens & Reynolds pen etc.|
COMPLEMENTARY GOODS – Let’s say A & B are two complementary goods , then :
· If quantity demanded for Good A rises then Demand for its complement good B also rises
· If quantity demanded for Good A goes down then the Demand for good B will also go down
SUBSTITUTE GOODS – Let’s say C & D are two substitute goods, then:
· If quantity demanded for Good C goes up then demand for good D goes down
· If the quantity demanded for good C goes down then the demand for gooD rises.
( Quantity demanded – It is the quantity of a commodity that people are willing to buy at a particular/given price at a particular point of time.)
Substitute goods are used instead of each other WHEREAS complementary goods are used with each other.