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Monday, April 11, 2011

Demand and Supply - Substitutes and Complements

After a brief detour on making a basic understanding of market, and some terms associated, we return to discussion on Demand and Supply. We would continue making these jumps across the topics to make the understanding comprehensive; do bear with us for it.

In the earlier blogs on S&D we have been making some assumptions, as we proceed further we would slowly dissolve these assumptions and make the idealistic scenario a more real one. In this direction we would deal with the first such inclusion - Substitutes and Complements. We would just limit our self to the definition in this blog and as we proceed explore them in detail.

Substitutes: Two goods are said to be substitutes if the increase in the price of one goods leads to an increase in the quantity demanded by the other.
Ex: Copper and Aluminium could be thought of as substitutes of each other - it could be seen in the market that the minute the price of aluminium increases the customer resorts to demanding copper instead. Similarly Tea and Coffee could be thought of as substitutes.

Complements: Two goods are said to be complements if the increase in the price of one leads to a decrease in the quantity demanded of the other.
Ex: Automobiles and its fuel could be thought of as complementary. If the price of the fuel increases, then the number of people demanding automobiles decreases. Similarly we could think of Tea and Sugar as complementary goods.

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