Aren't PB&J, chips and salsa, or cookies and milk perfect duos? Of course, they are! Goods that are usually consumed together are called complementary goods in economics. Keep reading to learn the definition of complementary goods and how their demand is intertwined. From the classic complementary goods diagram to the effect of price changes, we'll explore everything you need to know about this type of goods. Plus, we'll give you some examples of complementary goods that make you want to grab a snack! Don't confuse them with substitute goods! We'll show you the difference between substitute goods and complementary goods too!
Complementary Goods Definition
Complementary goods are products that are typically used together. They are goods that people tend to buy at the same time because they go well together or enhance each other's use. A good example of complementary goods would be tennis rackets and tennis balls. When the price of one good goes up, the demand for the other also goes down, and when the price of one good goes down, the demand for the other goes up.
Complementary goods are two or more goods typically consumed or used together, such that a change in the price or availability of one good affects the demand for the other good.
A good example of complementary goods would be video games and gaming consoles. People who buy gaming consoles are more likely to buy video games to play on them, and vice versa. When a new gaming console is released, the demand for compatible video games usually increases as well. Similarly, when a new popular video game is released, the demand for the gaming console it is compatible with may also increase.
What about a good whose consumption does not change when the price of other good changes? If price changes in two goods do not affect the consumption of either of the goods, economists say that the goods are independent goods.
Independent goods are two goods whose price changes do not influence the consumption of each other.
Complementary Goods Diagram
The complementary goods diagram shows the relationship between the price of one good and the quantity demanded of its complement. The price of Good A is plotted on the vertical axis, whereas the quantity demanded of Good B is plotted on the horizontal axis of the same diagram.
Fig. 1 - Graph for complementary goods
As Figure 1 below demonstrates, when we plot the price and quantity demanded of complementary goods against each other, we get a downward-sloping curve, which shows that the quantity demanded of a complementary good increases as the price of the initial good decreases. This means that consumers consume more of a complementary good when the price of one good decreases.
Effect of Price Change on Complementary Goods
The effect of price change on complementary is that the increase in the price of one good causes a decrease in demand for its complement. It is measured using cross price elasticity of demand.
Cross price elasticity of demand measures the percentage change in the quantity demanded of one good in response to a one percent change in the price of its complementary good.
It is calculated using the following formula:
\(Cross\ Price\ Elasticity\ of\ Demand=\frac{\%\Delta Q_D\ Good A}{\%\Delta P\ Good\ B}\)
- If the cross price elasticity is negative, it indicates that the two products are complements, and an increase in the price of one will lead to a decrease in the demand for the other.
- If the cross price elasticity is positive, it indicates that the two products are substitutes, and an increase in the price of one will lead to an increase in the demand for the other.
Let's say that the price of tennis rackets increases by 10%, and as a result, the demand for tennis balls decreases by 5%.
\(Cross\ Price\ Elasticity\ of\ Demand=\frac{-5\%}{10\%}=-0.5\)
The cross price elasticity of tennis balls with respect to tennis rackets would be -0.5, indicating that tennis balls are a complementary good for tennis rackets. When the price of tennis rackets increases, consumers are less likely to purchase balls, decreasing the demand for tennis balls.
Complementary Goods Examples
Examples of complementary goods include:
A 20% increase in the price of fries causes a 10% decrease in the quantity demanded of ketchup. What is the cross-price elasticity of demand for fries and ketchup, and are they substitutes or complements?
Solution:
Using:
\(Cross\ Price\ Elasticity\ of\ Demand=\frac{\%\Delta Q_D\ Good A}{\%\Delta P\ Good\ B}\)
We have:
\(Cross\ Price\ Elasticity\ of\ Demand=\frac{-10\%}{20\%}\)
\(Cross\ Price\ Elasticity\ of\ Demand=-0.5\)
A negative cross-price elasticity of demand indicates that fries and ketchup are complementary goods.
Complementary Goods vs Substitute Goods
The main difference between complementary and substitute goods is that complements are consumed together whie substitute goods are consumed in place of each other. Let's break the differences down for better understanding.
| Substitutes | Complements |
| Consumed in place of each other | Consumed with each other |
| A price reduction in one good increases the demand for the other good. | A price increase in one good decreases demand for the other good. |
| Upward slope when the price of one good is plotted against the quantity demanded of the other good. | Downward slope when the price of one good is plotted against the quantity demanded of the other good. |
Complementary Goods - Key takeaways
- Complementary goods are products that are typically used together and influence each other's demand.
- The demand curve for complementary goods is downward sloping, indicating that an increase in the price of one good decreases the quantity demanded of the other good.
- The cross price elasticity of demand is used to measure the effect of price changes on complementary goods.
- A negative cross price elasticity means that the goods are complements, while a positive cross price elasticity means that they are substitutes.
- Examples of complementary goods include hot dogs and hot dog buns, smartphones and protective cases, printer and ink cartridges, cereal and milk, and laptops and laptop cases.
- The main difference between complementary and substitute goods is that complementary goods are consumed together while substitute goods are consumed in place of each other.
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