Independent, Complement, and Substitute Goods and Services

There may be two supermarkets; one that is on the way home from work, and another that is 15 minutes out of the way. The geographical location of the store provides convenience for the customer, and they take this into account when deciding on a product. FasterCapital is #1 online incubator/accelerator that operates on a global level. We provide technical development and business development services per equity for startups.

If the price of coffee increases significantly, some consumers may switch to tea as a more affordable alternative. Similarly, in the transportation industry, cars and motorcycles can be seen as substitute goods. When fuel prices rise, individuals may opt for motorcycles instead of cars due to their higher fuel efficiency. Substitute goods play a crucial role in the world of economics, as they are products or services that can be used as alternatives to one another. When the price of a particular good rises, consumers often seek out substitute goods that offer similar benefits at a lower cost.

On the other hand, complementary goods are products that are consumed together with another product. For example, if the price of coffee increases, consumers may also decrease their demand for sugar, which is a complementary good. Price is one of the most crucial factors that influence the demand for substitute goods. When the price of a good increases, consumers tend to look for cheaper alternatives.

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1. Much of the interesting economic activity in terms of strategy and differentiation comes from complementary and substitute products and services.
2. For example, if the price of a pizza at Domino’s rises by 1%, then consumers will purchase more Pizza Hut pizzas because they are cheaper.
3. On the same note, you can switch from one pen to the other easily since the switching costs are low.
4. If the price of phone cases were to increase, consumers may be more likely to switch to a substitute, such as a screen protector, rather than pay the higher price for a phone case.
5. For instance, if the price of one product increases, consumers may opt for a substitute that is cheaper or more accessible.
6. The benefit of substitute products is that they provide consumers with variety when choosing goods to satisfy their needs.
7. Elasticity of demand for substitute goods can vary widely depending on the specific goods in question.

In the above graph, the price of the substitute good (coffee) is shown on the Y-axis, and demand for the given commodity (tea) is shown on X-axis. When there is an increase in the price of coffee from OP to OP1, then the demand for tea will also increase from OQ to OQ1. The greater the number of substitute products in the market, the more rivalry exists in the industry. For example, coffee can be said to be a substitute for tea, and solar energy is a substitute for electricity.

They are usually cheaper than the original good

The goods which are used together to satisfy a specific want, like bread and butter are known as Complementary Goods. The price of a complementary good and demand for the given commodity inversely relates to each other. Income level is also a factor that influences the demand for substitute goods. Consumers with lower income may be more likely to switch to a substitute when the price of the original good increases. The availability of substitute goods also plays a crucial role in determining the demand for them.

1. When there are more substitute goods available, it can increase competition among producers.
2. In the technology industry, if the price of Apple products increases, consumers might switch to Android products as a substitute.
3. These factors can range from changes in price to shifts in consumer preferences.
4. However, from a company’s perspective, substitute products create a rivalry.
5. A sports car may be more expensive, but it provides a different driving experience than a sedan.
6. For example, suppose there has been an increase in the demand for the sales of chocolate.

Understanding how substitute goods work is essential for businesses looking to stay competitive in their respective markets. By identifying substitute goods and understanding how they affect demand, businesses can make informed decisions about pricing and marketing strategies. That is, consumption of one product reduces or replaces the need for the other.

What are Complementary Goods?

This is problematic if the item in question is another meat for which pork is a near perfect substitute, for the price increase will have an effect on demand of the original good. From a business perspective, understanding the elasticity of demand for substitute goods is important for pricing strategies. If a business knows that the demand for their product is relatively inelastic, they may be able to increase the price without losing too many customers.

Direct substitutes are also understood as perfect substitutes, while indirect substitutes are also known as imperfect substitutes or less perfect substitutes. Substitutes that are not identical to the original have a low cross-elasticity of demand. A 1% increase in the price of good A would lead to less than a 1% decline in the quantity demanded of good A. For example, if the price of a Domino’ pizza rises by 1%, the quantity demanded of the Domino’s pizza would fall by more than 1%.

They are usually close substitutes, meaning that they satisfy the same needs or purposes. If substitute goods are close substitutes, then an increase in the price of the Substitute good will lead to a decrease in the demand for the good in question. Two goods are direct substitutes if an increase in the price of one leads to an increase in the demand for the examples of substitute goods other. For example, if the price of good A rises, then consumers will purchase more of good B. The demand curve for a substitute product is shifted to the right when the price of the other product increases. Cross elasticity of demand means how much quantity of one product will be demanded if the price changes as compared to its substitute.

Take your learning and productivity to the next level with our Premium Templates. Access and download collection of free Templates to help power your productivity and performance. Switching cost is the loss or the extra cost you incur from leaving the option you were using for another. For example, if you have been taking notes with a pen but now you want to take them using a video recording device, the switching cost here is high since you will have to buy the video recording device. On the same note, you can switch from one pen to the other easily since the switching costs are low. Substitute goods are commodity which the consumer demanded to be used in place of another good.