Complementary Goods and Substitute Goods

There are, as we all know it, certain things that just go well together and belong together; hot dogs and hot dog buns for example, tennis shoes and shoestrings, cake and ice cream, a bed and sheets, etc, etc. In each one of these couples, the goods in point are more useful or more enjoyable when they are used with the other member of the match.

Given that these goods complement each other, economists call these complementary goods. An interesting aspect of complementary goods is that a change in the price of a complement affects the other complement. For example if a price reduction is made on hot dogs, people will not only start to buy more hot dogs, but hog dog buns as well and more mayonnaise, ketchup and mustard is sold as well.

On the other hand, consider substitute goods – which are goods that have similar functions, so that if the price of one of these increases, people pass on over to another. For example, if the price of a bus ride increases, more people will start using their automobiles. If the cost of sending mail increases, then people would simply turn to sending more emails rather then direct mail.

Both complementary goods as well as substitute goods are the result of cross pricing. An increase in the price of a complement causes the demanded amount of the “couple” to decrease, whereas an increase in the price of a substitute makes the demanded amount of the other good increase.

Whenever you look at the economy, think of it as a great organic everything, where things do not occur separately. When the price of a good changes, it does not only affect that good, but it affects many others that are substitute or complementary. If the prices of the substitutes or the complements change, as a result of the change of the initial price, then all the substitutes and complements also become affected by it.