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What are Complementary Goods?

Complementary goods refer to a pair or set of goods that consumers often use together in consumption or production. In other words, these are products or services that people consume together so that the demand for one good is positively related to the demand for the other good.

These goods can be physical goods, such as cars and gasoline, or services like printers and ink cartridges.

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Key Highlights

Complementary goods have an interdependent relationship, which means that a change in the price or availability of one good can affect the demand for the other good.

Businesses often sell them together as a package, which can help businesses to increase sales and improve profitability.

By offering such goods, businesses can create a sense of brand loyalty among customers. For example, a customer may be more likely to purchase a particular brand of the printer if they know that the ink cartridges for that printer are widely available and affordable.

How do Complementary Goods Work?

The demand for a complementary good depends on the demand for the primary product/service. For example, peanut butter and jelly are complementary because consumers use them together to make a sandwich. The demand for peanut butter can increase the demand for jelly and vice versa.

They can also have cross-price elasticity of demand, which means that changes in the price of one good can affect the demand for the other good. If the price of one complementary product increases, then the demand for the other good may decrease, as it becomes more expensive to purchase both of them together.

Examples #1 Cars and Fuels

When someone purchases a car, it becomes necessary for them to also purchase fuel. It is because the two products are mutually dependent on each other and serve no practical purpose without each other. If demand for cars increases in the market, the demand for fuels will automatically increase because cars are non-functional without fuel. Therefore, cars and fuels are complementary to each other.

#2 Mobile Phones and SIM Cards

Both mobile phones and SIM cards require each other to provide a complete mobile communication service. Additionally, if the price of mobile phones increases, it may decrease the demand for mobile phones, which could lead to a decrease in the demand for SIM cards and vice versa.

Cross-Elasticity of Demand for Complementary Goods

When the change in the price of one good affects the change in demand for another product, it is a cross-elasticity of demand.

As a result, complementary goods always have a negative cross-elasticity of demand.

For example, when the price of fuel goes up, the demand for cars decreases among consumers.

Complementary Goods Graph

A graph or demand curve shows the relationship between two goods by plotting them on the x and y-axis.

The initial price of a primary good is P1, and the demand for its complementary good is D1. When the price of the primary good decreases to P2, the demand for its complementary product increases to D2.

The slope of the line indicates how one good affects the other. The steeper the slope, the more one’s price affects the other’s demand.

Example:

The graph depicts the inverse relationship between the price of a complementary good (hot dog buns) and the demand for the product (hot dogs). In this graph, the vertical axis shows the price of one good (hot dog buns), while the horizontal axis shows the demand for the complementary good (hot dogs).

Complementary Vs. Substitute Goods

Particulars

Complementary Goods

Substitute Goods

Definition Consumers use these goods together. Thus, one good’s demand can affect the other’s demand. Consumers use these goods in place of each other. Thus, the demand for one is linked to the other good’s price.

Examples

Pen and paper

Coffee and milk

Car and fuel

Razors and razor blades

Eyeglasses and contact lenses

Butter and margarine

Laptops and desktops

Price Relationship Inverse relationship: Increase in the price of one good lead to a decrease in demand for both goods. Direct relationship:

An increase in the price of one good lead to an increase in demand for the other good.

Cross-Price Elasticity Negative Positive

Impact on Sales Sales of one product affect (increases or decreases) sales of the other. Sales of one product may increase when the price of the other product increases

Frequently Asked Questions (FAQs) Q1. What are complementary goods?

Answer: Complementary goods are products or services that consumers buy or use in conjunction with each other, meaning that the demand for one good is directly related to the demand for the other.

Q2. What are some examples of complementary goods?

Answer: Some examples of goods that are complementary are:

Video game consoles and video games – A particular video game console is often designed to play specific video games.

Razors and razor blades – Razors require replacement blades, and the demand for blades depends on the number of razors in use.

Mobile phones and mobile phone cases – Mobile phone cases provide protection and personalization for mobile phones.

Computer hardware and software – Certain computer software may only run on specific hardware.

Cameras and memory cards – Digital cameras require memory cards to store photos.

Q3. What is the cross-elasticity demand for complementary goods?

For example, if the price of ink cartridges for a printer increases, the demand for the printer may decrease because the cost of buying both the printer and the ink cartridges has gone up.

Q4. What is the difference between complementary and substitute goods?

Answer: Complementary goods are goods that are typically used together, whereas substitute goods are goods that are interchangeable, i.e, consumers can use them in place of each other. For example, peanut butter and jelly are complementary, while peanut butter and cheese are substitute goods.

Q5. What effect does price change have on complementary goods?

Answer: The price change of one complementary good can have an impact on the demand for both products.

For example, if the price of bicycles increases, it could lead to a decrease in the demand for both bicycles and helmets, as many people who purchase bicycles also purchase helmets to use while riding.