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Complementary Goods: Definition & Examples

Complementary Goods Definition

A Complementary good is a product or service that adds value to another. In other words, they are two goods that the consumer uses together. For example, cereal and milk, or a DVD and a DVD player.

On occasion, the complementary good is absolutely necessary, as is the case with petrol and a car. However, a complementary good can add value to the initial product. For instance, pancakes and maple syrup.

• A complementary good is a good that adds value to another, or, a good that cannot be used without each other.
• Complementary goods that cannot be used without each other are known to have a strong relationship. In other words, when the price goes up on one, the demand goes down for the other good.
• Examples include: Tennis Balls and Tennis Racket; PlayStations and Games; Movies and Popcorn; and Mobile Phones and Sim Cards.

Complementary Goods have a negative relationship with each other – which means that when product X increases in price, demand for product Y falls. This is because fewer people buy product X due to the higher price. As a result, fewer people are also buying product Y, which only adds value to product X. In economic jargon, this is known as ’negative cross-elasticity of demand’ .

Let us consider an iPhone. If its price increases by 10 percent, this may lead to lower levels of demand. At the same time, if fewer people are buying iPhones, then there are also fewer people buying iPhone cases. It is because of this relationship that we can consider these as complementary goods.

Weak Complementary Goods

Not all complementary goods are the same. There are ‘weak’ and ‘strong’ complementary goods. Weak complementary goods respond to increases in prices in a very limited way. In other words, they are not responsive to increases in prices of complementary goods. However, there is some connection between the two.

If we take pancakes and maple syrup as an example – they are two complementary goods. Consumers use maple syrup with pancakes, but they also use other toppings. For instance, consumers may use bananas or sugar instead. Therefore, whilst maple syrup is used to complement pancakes, there are many other alternatives that make the relationship between the two weak.

If the price of maple syrup increases by 10 percent, but the demand for pancakes falls by 1 percent, the relationship is therefore weak. This is because the price increase of the complementary product has little effect on the demand on the other.

Strong Complementary Goods

Strong Complementary Goods have a close relationship with each other. That is to say that one good is reliant on the other to add value. For example, we have a DVD and a DVD player. These are known as strong complementary goods because they are pretty useless without one another.

The relationship between strong complementary goods is very elastic. In other words, when the price of DVD players rise, the demand for DVDs is likely to fall. So we can say there is a ‘ negative cross-elasticity’ between them. In fact, if you look at any product that could not be sold by itself – it is likely a strong complementary good. So if you could only use Product X if you first had Product Y, then they are strong complementary goods.

Complementary Goods Graph

As we can see from the graph below; when the price of an iPhone decreases, the demand for iPhone cases increases. This is because the demand for iPhones increases as more consumers are buying it at the lower prices. In turn, those same consumers are demanding iPhone cases – which translates into high sales.

Complementary Goods Examples

Complementary goods are goods which rely on each other to add value. There are a large number of complementary goods which are necessary in order for the other to work. For example, petrol is needed for cars to work. However, there are also weak complementary goods that are not necessarily needed in order to function. An iPhone does not need a phone case in order to work, but is still classed as a complementary good. Other examples include:

• Tennis Balls and Tennis Racket
• Mobile Phones and Sim Cards
• Petrol and Cars
• Burger and Burger Buns
• PlayStation and Games
• Movies and Popcorn
• Shoes and Insoles
• Pencils and Notebooks

A Complementary good can be a product or service that is sold separately that adds value to another. In other words, they are two or more goods that are used together.

Substitute goods are two goods that can be used i n place of one another , for example, Dominos and Pizza Hut. By contrast, complementary goods are those that are used with each other . For example, pancakes and maple syrup. The key difference is that substitute goods replace one another, whilst complementary goods add value to the other.

Some examples of complementary goods include: 1. Tennis Balls and Tennis Racket 2. Mobile Phones and Sim Cards 3. Petrol and Cars 4. Burger and Burger Buns 5. PlayStation and Games 6. Movies and Popcorn 7. Shoes and Insoles 8. Pencils and Notebooks

Paul Boyce is an economics editor with over 10 years experience in the industry. Currently working as a consultant within the financial services sector, Paul is the CEO and chief editor of BoyceWire. He has written publications for FEE, the Mises Institute, and many others.

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• Complementary Goods

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! 

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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. W hen 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. T he 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.

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:

\(Cross\ Price\ Elasticity\ of\ Demand=\frac{\%\Delta Q_D\ Good A}{\%\Delta P\ Good\ B}\)

• I f 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:

• Hot dogs and hot dog buns
• Chips and salsa
• Smartphones and protective cases
• Printer and ink cartridges
• Cereal and milk
• Laptops and laptop cases

To better understand the concept, analyze the example below.

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?

\(Cross\ Price\ Elasticity\ of\ Demand=\frac{-10\%}{20\%}\)

\(Cross\ Price\ Elasticity\ of\ Demand=-0.5\)

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.

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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Frequently Asked Questions about Complementary Goods

What are complementary goods?

Complementary goods are products that are typically used together and influence each other's demand. An increase in the price of one good decreases the quantity demanded of the other good.

How do complementary goods affect demand?

Complementary goods have a direct impact on the demand for each other. When the price of one complementary good increases, the demand for the other complementary good decreases, and vice versa. This is because the two goods are typically consumed or used together, and a change in the price or availability of one good affects the demand for the other good

Do complementary goods have derived demand?

Complementary goods do not have derived demand. Consider the case of coffee and coffee filters. These two goods are typically used together - coffee is brewed using a coffee maker and a coffee filter. If there is an increase in the demand for coffee, it will lead to an increase in the demand for coffee filters since more coffee will be brewed. However, coffee filters are not an input in the production of coffee; they are simply used in the consumption of coffee.

Are oil and natural gas complementary goods?

Oil and natural gas are often considered substitute goods rather than complementary goods because they can be used for similar purposes, such as heating. When the price of oil increases, consumers may switch to natural gas as a cheaper alternative and vice versa. Therefore, the cross-price elasticity of demand between oil and natural gas is likely to be positive, indicating that they are substitute goods.

What is the cross elasticity of demand for complementary goods?

The cross elasticity of demand for complementary goods is negative. This means that when the price of one good increases, the demand for the other good decreases. Conversely, when the price of one good decreases, the demand for the other good increases.

What is the difference between complementary goods and substitute goods?

The main difference between a substitute and a complement is that substitute goods are consumed in place of each other, whereas complements are consumed together.

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Complementary Goods Defined

Products that are used together are called complementary goods.

Examples of Complementary Goods

• A video game console and the games that can be played on it
• Tennis rackets and tennis balls
• Mobile phones and mobile phone credit for sending texts and making calls
• An iPhone and apps
• A car and gasoline

Complementary Goods and Cross Elasticity of Demand

Complementary goods have a negative cross elasticity of demand. When one good’s price increases, the demand for both of the complementary goods will fall. The more closely linked these goods are, the higher the cross elasticity of demand.

If the complementary goods are only weakly linked, the cross elasticity of demand will be low. For instance, if the price of tea goes up, it’ll only have a marginal impact on the reduction of demand for tea and the consumption of milk.

But if the price of an Android phone increases, it’ll negatively affect its sales, reducing demand for Android apps.

How Firms Make Use of Complementary Goods

They increase related sales..

Supermarkets place related food items close together. You’ll see expensive pasta sauces next to pasta, for instance. The firm’s goal is to increase overall sales through the suggestion of possible related complementary goods.

They gain loyal consumers.

Firms can also implement the strategy of offering a base product at a low price. This is because they know that when consumers purchase the base product, they can increase sales of related add-on items. The owners of PlayStation, for instance, have an incentive to decrease the price of the PlayStation itself because they will then make more sales of licensed games. This increase in revenue offsets the fall caused by the lowered price. 

Cutting back on the price of videogame consoles like PlayStation can help the firm increase profits on licensed games. Similarly, many printers have low prices because the firms that manufacture them want to make the most profit by selling compatible ink.

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Pricing of Complementary Goods and Network Effects

We discuss the case of a monopolist of a base good in the presence of a complementary good provided either by it or by another firm. We assess and calibrate the extent of the influence of the profits from the base good that is created by the existence of complementary good, i.e., the extent of the network effect. We establish an equivalence between a model of a base and a complementary good and a reduced-form model of the base good in which network effects are assumed in the consumers’ utility functions as a surrogate for the presence of direct or indirect network effects, such as complementary goods produced by other firms. We also assess and calibrate the influence on profits of the intensity of network effects and quality improvements in both goods. We evaluate the incentive that a monopolist of the base good has to improve its quality rather than that of the complementary good under different market structures. Finally, based on our results, we discuss a possible explanation of the fact that Microsoft Office has a significantly higher price that Microsoft Windows although both products have comparable market shares.

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Complementary Goods

Complementary goods are products which are used together.

• DVD player and DVD disks to play in it.
• Tennis balls and tennis rackets.
• Mobile phones and mobile phone credit for making calls.
• iPhone and Apps to use with an iPhone.
• Petrol and car.

Complementary Goods and Cross Elasticity of Demand

Complementary goods will have a negative cross elasticity of demand . If the price of one good increases, demand for both complementary goods will fall. The more closely linked the goods are, the higher will be the cross elasticity of demand.

If they are weak complementary goods then there will be a low cross elasticity of demand. For example, if the price of tea increases it will only have a marginal impact on reducing demand for tea and consumption of milk.

However, if the price of Android Phones increases, it will negatively affect sales and therefore reduce demand for Android Apps.

How firms make use of complementary goods

Increase related sales . Supermarkets will place related food items close to each other. For example, next to pasta – expensive pasta sauces. The firm hopes to increase overall sales by suggesting possible related complementary goods.

Gain loyal consumers to make related sales . Another strategy a firm can implement is to offer a base product at a low price, knowing that if consumers buy ‘base product’ they can increase sales of related (and profitable) add-on items. For example, the owners of PlayStation have an incentive to cut the price of the PlayStation itself. If they do, they know they will make increases sales of licensed games, and this increase in revenue will offset the fall in revenue from a lower price.

Reducing the price of games consoles, such as Playstation may enable the firm to make more profit on licensed games.

Many printers are sold quite cheaply because firms who manufacture printers hope to make the most profit on selling compatible ink.

• Different types of goods
• Substitute goods – the opposite of complementary goods – alternative goods.

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Substitutes and Complements

Last updated 27 Oct 2019

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In this micro video on the theory of demand, we look at substitute and complementary goods. You will come across these when you cover cross price elasticity of demand in introductory microeconomics.

Substitute goods

• Substitute goods are two alternative goods that could be used for the same purpose.
• They are goods that are in competitive demand
• A rise in the prices of Good S will lead to a contraction in demand for Good S
• This might then cause some consumers to switch to a rival product Good T
• This is because the relative price of Good T has fallen
• The cross-price elasticity of demand for two substitutes is positive

Examples of substitute goods:

• Tea and coffee
• Smartphone Brands
• Rival ride sharing apps
• Competing supermarket chains
• Online streaming platforms
• Cereal brands

Evaluation points on substitutes:

• Always consider the cost of substitution – there might be switching costs for consumers if they opt for a new brand
• Some products are close substitutes with a high (positive) cross price elasticity of demand
• Others are weaker substitutes especially when consumer/brand loyalty is high

Complement goods

• Complementary goods are products which are bought and used together
• A fall in the price of Good X will lead to an expansion in quantity demand for X
• And this might then lead to higher demand for the complement Good Y
• Complements are said to be in joint demand
• The cross-price elasticity of demand for two complements is negative

Examples of complement goods:

• Fish and chips
• Smartphones and apps
• Solar panels & batteries
• Flights and taxi services
• Shoes and polish
• Pasta and pasta sauces

Complement goods and product bundling

• Businesses understand that complements are bought together
• Product bundling is to offer bundles of products sold together at an attractive discount
• Substitutes
• Invisible Hand
• Cross-price elasticity of demand
• Complements
• Joint demand

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Complementarity of Goods and Cooperation Among Firms in a Dynamic Duopoly

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• Mario Alberto Garcia Meza 13 &
• Cesar Gurrola Rios 13  

Part of the book series: Static & Dynamic Game Theory: Foundations & Applications ((SDGTFA))

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We construct a simple model to show how complementarities between goods yield a possibility for cooperation between rival firms. To show this, we use a simple dynamic model of Cournot oligopoly under sticky prices. While cooperation in an oligopoly model with sticky prices is not feasible, there exists a feasible cooperation when good are perfect complements and not substitutes.

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Meza, M.A.G., Rios, C.G. (2020). Complementarity of Goods and Cooperation Among Firms in a Dynamic Duopoly. In: Petrosyan, L.A., Mazalov, V.V., Zenkevich, N.A. (eds) Frontiers of Dynamic Games. Static & Dynamic Game Theory: Foundations & Applications. Birkhäuser, Cham. https://doi.org/10.1007/978-3-030-51941-4_11

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• Supply and Demand
• Supply Curve
• Supply Function
• Law of Supply
• Demand Curve
• Demand Function
• Law of Demand
• Market Demand
• Quantity Supplied vs Supply
• Quantity Demanded vs Demand
• Market Equilibrium
• Market Clearing Price
• Changes in Market Equilibrium
• Determinants of Supply
• Determinants of Demand
• Types of Elasticity of Demand
• Point Elasticity of Demand
• Price Elasticity of Supply
• Price Elasticity of Demand
• Elastic vs Inelastic Demand
• Cross Elasticity of Demand
• Income Elasticity of Demand
• Normal Good vs Inferior Good
• Substitute vs Complements
• Price Floor
• Price Ceiling

Substitute goods (or simply substitutes) are products which all satisfy a common want and complementary goods (simply complements) are products which are consumed together. Demand for a product’s substitutes increases and demand for its complements decreases if the product’s price increases.

One of the determinants of demand i.e. factors that can bring about a shift in the demand curve of a product is the price of the related goods. There are two types of related goods in general: good(s) which can be consumed instead of the product and good(s) which is consumed together with the product. The former is called a substitute good and the latter is a complementary good.

Substitute Goods

Coke and Pepsi, iPhone and Galaxy S series, Nike and Adidas are a few examples of substitute goods. If price of Coke increases, demand for Pepsi should increase because many Coke consumers will switch over to Pepsi. Similarly, prices of iPhone and Galaxy S affect their mutual demand. Given that there are many fanboys who will reprioritize their spending to afford an iPhone even after the price increase, many rational consumers will weight their preference for one product over the other and the premium they are willing to pay.

Complementary Goods

iPhones and iPhone skins, air travel and hotels, etc. are examples of complementary goods i.e. goods that are used/consumed together. If iPhone becomes expensive and its quantity demanded decreases, you would expend the demand for iPhone covers to drop too and vice versa. It follows that demand for a product is to some extent dependent on the price of its complementary goods.

Other examples of complementary goods include cars and gasoline, Big Mac and McFries, coffee and cheesecake, etc.

Substitutes, Complements and Cross Elasticity of Demand

The extent to which two products are substitutes or complements can be measured by calculating their mutual cross elasticity of demand. The cross elasticity of demand measures the percentage change in quantity demanded of the product that occurs in response a percentage change in price of a substitute good. If the cross elasticity of demand is positive, the products are substitute goods. On the other hand, if cross elasticity is negative, the products are complements.

The following chart shows what happens to demand for two substitute goods, iPhone and Galaxy S, when the price of Galaxy S changes.

When the price of Galaxy S changes from $950 to $1,050, its quantity demanded falls from 330 million per annum to a little more than 290 million. In response, the demand curve for iPhone shifts outward, i.e. its demand increases.

by Obaidullah Jan, ACA, CFA and last modified on Feb 5, 2019

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Complementary Goods, Oligopoly and Bundling: a reassessment of Cournot’s merger effects

In recent years the Antitrust authorities in the U.S. and EU have been addressing the issues involving non-horizontal mergers, which include vertical and conglomerate mergers, including complementary products mergers. The EU commissioned two reports on the economic knowledge about these mergers, totaling over 500 pages. This work has not recognized what we analyze here. Complementary products mergers are guided by the intuition behind Cournot’s complementary monopoly merger analysis. Pre merger there is “double marginalization”; merger leads to lower prices. We show how tenuous this intuition is if applied to oligopolists. We start with Merger Guidelines and three statements from antitrust authorities. We formalize these as theoretical propositions about such mergers. The propositions are: 1) Cournot effects will lower prices; 2) Complementary products mergers will never lead to higher prices (barring specific perverse effects); 3) if these mergers lead to mixed bundling they will be to the consumers’ advantage by offering more choice. These are all positive economics statements about what will happen. We prove these are all theoretically false via counter example. If there is vertical/quality product differentiation, price setting oligopoly and compatible components, the Cournot result disappears in price setting oligopoly modeling even using the Cournot demand structure. Such mergers will not lower prices. We show an alternative demand structure for which such mergers raise prices for all buyers through bundling. And we show a third demand structure in which mixed bundling is the culprit in extracting high prices – the mixed bundling doesn’t so much offer a discount from individual component pricing as it instead endogenously raises the individual component prices, before offering a “discount” for the purchase of a bundle. We do not do a full policy analysis, and our proofs by counter example use stylized demand structures. We emphasize, however, that before attempting a normative policy analysis, the positive economics must be understood. The views expressed herein are the authors’ own and are not purported to reflect those of the employers.

Related Papers

Serdar A . K . A . İ S M A İ L S E R D A R Dalkir , Robert Masson

DESCRIPTION In recent years the Antitrust authorities in the U.S. and EU have been addressing the issues involving non-horizontal mergers, which include vertical and conglomerate mergers, including complementary products mergers. The EU commissioned two reports on the economic knowledge about these mergers, totaling over 500 pages. This work has not recognized what we analyze here. Complementary products mergers are guided by the intuition behind Cournot’s complementary monopoly merger analysis. Pre merger there is “double marginalization”; merger leads to lower prices. We show how tenuous this intuition is if applied to oligopolists. We start with Merger Guidelines and three statements from antitrust authorities. We formalize these as theoretical propositions about such mergers. The propositions are: 1) Cournot effects will lower prices; 2) Complementary products mergers will never lead to higher prices (barring specific perverse effects); 3) if these mergers lead to mixed bundling...

Review of Law & Economics

Antitrust policy in the US and EU toward non-horizontal mergers between oligopolists is based on a strong presumption of Cournot effects and/ or improvements in consumer welfare through post-merger bundling. We show that complementary goods mergers between firms that possess market power in their respective components markets do not always assure either. The analysis underscores the importance of fully specifying the nature of premerger rivalry among all market participants and the assumed distribution of consumer preferences when making predictions about the likely effects of such transactions. https://masson.economics.cornell.edu/docs/rle-2013-0014_2.pdf

Journal of Retailing and Consumer Services

Subir Bandyopadhyay

In an attempt to provide a framework that can help firms find optimum bundling product categories and pricing strategies that maximize their profits, this study develops a profit-maximization model. The results indicate that optimum bundles and price strategies exist; specifically, if a firm uses a bundling strategy to sell its products, it should combine highly complementary products and charge a relatively lower price. The value of a bundling strategy always increases with the size of market and price sensitivity. Managers can use the provided model framework and related advice and examples to plan their bundling strategies.

The Journal of Industrial Economics

Nicholas Economides

This article analyzes the competition and integration among complementary products that can be combined to create composite goods or systems. The model generalizes the Cournot duopoly complements model to the case in which there are multiple brands of compatible components. It analyzes equilibrium prices for a variety of organizational and market structures that differ in their degree of competition and integration. The model applies to a variety of product networks including ATMs, real estate MLS, airlines CRS, as well as to non-network markets of compatible components such as computer CPUs and peripherals, hardware and software, and long distance and local telephone services.

Elisa Barocio

The existing literature shows that a decrease in the degree of substitutability increases a monopoly's incentive to bundle. This paper in addition takes into account competition in the second product market and then reexamines how intra-brand and inter-brand product differentiations affect the incentive to bundle. In order to formally examine the above conjectures, this research builds up a two-firm, two-product model in which product 1 (monopoly product) is produced only by the bundling firm and product 2 (competing product) is produced by both firms. The analysis shows that under both Bertrand and Cournot competitions the incentive to bundle does not necessarily increase with the degree of intra-brand differentiation, while it strictly decreases with the degree of inter-brand differentiation. Moreover, under Bertrand competition bundling always decreases consumer surplus, but may increase the competitor's profit and social surplus. Under Cournot competition bundling always reduces the opponent's profit and social welfare, but may increase consumer surplus.

SSRN Electronic Journal

Ornella Tarola

Research in Economics

Poudou Jean-Christophe

We study the incentives to collude when firms use mixed bundling or independent pricing strategies for the sale of two components of a composite good. The main finding is that collusion is less sustainable under mixed bundling, because this increases the profitability of deviations from the collusive path. The result is robust to extensions with an endogenous choice of the mode of competition (with bundling or independent pricing) and to competition in quantities. These results offer a novel argument against a per se rule concerning bundling in antitrust policy. JEL classification: D4, L1

Jeff MacKie-Mason

Volker Nocke

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Chapter 1: Introduction

• Introduction to Microeconomics
• Microeconomics and Macroeconomics: Meaning, Scope, and Interdependence
• Difference between Microeconomics and Macroeconomics
• Economic Problem & Its Causes
• Central Problems of an Economy
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Chapter 3: Demand

• Theory and Determinants of Demand
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• Difference between Individual Demand and Market Demand
• What is Demand Function and Demand Schedule?
• Law of Demand
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• Difference between Expansion in Demand and Increase in Demand
• Difference between Contraction in Demand and Decrease in Demand

Substitute Goods and Complementary Goods

Difference between substitute goods and complementary goods.

• Normal Goods and Inferior Goods
• Difference between Normal Goods and Inferior Goods
• Types of Demand
• Substitution and Income Effect
• Difference between Substitution Effect and Income Effect
• Difference between Normal Goods, Inferior Goods, and Giffen Goods

Chapter 4: Elasticity of Demand

• Price Elasticity of Demand: Meaning, Types, Calculation and Factors Affecting Price Elasticity
• Methods of Measuring Price Elasticity of Demand: Percentage and Geometric Method
• Difference between Elastic and Inelastic Demand
• Relationship between Price Elasticity of Demand and Total Expenditure

Chapter 5: Production Function: Returns to a Factor

• Production Function: Meaning, Features, and Types
• What is TP, AP and MP? Explain with examples.
• Law of Variable Proportion: Meaning, Assumptions, Phases and Reasons for Variable Proportions
• Relationship between TP, MP, and AP
• Law of Returns to Scale: Meaning and Stages
• Difference between Returns to Factor and Returns to Scale

Chapter 6: Concepts of Cost and Revenue

• What is Cost Function?
• Difference between Explicit Cost and Implicit Cost
• Types of Cost
• What is Total Cost ? | Formula, Example and Graph
• What is Average Cost ? | Formula, Example and Graph
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• Break-even Analysis: Importance, Uses, Components and Calculation
• What is Break-even Point and Shut-down Point?

Chapter 7: Producer’s Equilibrium

• Producer's Equilibrium: Meaning, Assumptions, and Determination

Chapter 8: Theory of Supply

• Theory of Supply: Characteristics and Determinants of Individual and Market Supply
• Difference between Stock and Supply
• Law of Supply: Meaning, Assumptions, Reason and Exceptions
• Changes in Quantity Supplied and Change in Supply
• Difference between Movement Along Supple Curve and Shift in Supply Curve
• Difference between Change in Quantity Supplied and Change in Supply
• Difference Between Expansion of Supply and Increase in Supply
• Difference between Contraction of Supply and Decrease in Supply
• Price Elasticity of Supply : Type, Determinants and Methods
• Types of Elasticity of Supply

Chapter 9: Forms of Market

• Market : Characteristics & Classification
• Perfect Competition Market: Meaning, Features and Revenue Curves
• Monopoly Market: Features, Revenue Curves and Causes of Emergence
• Monopolistic Competition: Characteristics & Demand Curve
• Oligopoly Market : Types and Features
• Difference between Perfect Competition and Monopoly
• Difference between Perfect Competition and Monopolistic Competition
• Difference between Monopoly and Monopolistic Competition
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• Determination of Market Equilibrium under Perfect Competition
• Effects of Changes in Demand and Supply on Market Equilibrium
• Price Ceiling and Price Floor or Minimum Support Price (MSP): Simple Applications of Supply and Demand
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• Important Formulas in Microeconomics | Class 11

Substitute Goods and Complementary Goods are two economic concepts describing the relationship between two or more different products in terms of their demand and consumption patterns. Substitute goods are the goods that can be used in place of one another; however, Complementary goods are the goods that can be used together. It is essential to understand the relationship between substitute goods and complementary goods, especially for organisations and policymakers. It is so because the relationship between these goods helps businesses and policymakers in predicting consumer behaviour, setting prices, and developing marketing strategies.

Geeky Takeaways:

• Substitute Goods are those goods which are used in place of one another to fulfill a specific need or want. For example, Coke and Coca-Cola.
• Complementary Goods are those goods which are used together to fulfill a specific need or want. For example, TV and remote.
• Cross Demand helps in determining the demand of a given commodity when the price of other related commodities changes.
• A commodity’s demand is only affected by a change in the price of related goods and not the price of unrelated goods.

Table of Content

What are Substitute Goods?

What are complementary goods, what is cross demand, cross price effect on demand curve.

The goods which can be used in place of one another to satisfy a specific want, like tea and coffee are known as Substitute Goods. The price of substitute goods directly affects the demand for a given commodity.

For example, if the price of a substitute good (say, coffee) increases, then demand for the given commodity (say, tea) will increase as compared to coffee.

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 OP 1 , then the demand for tea will also increase from OQ to OQ 1 .

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.

For example, if the price of a complementary good (say, butter) increases, then demand for the given commodity (say, bread) will decrease as it will become costlier for the consumer to use both goods together. 

In the above graph, the price of the complementary good (butter) is shown on the Y-axis and demand for the given commodity (bread) is shown on X-axis. When there is an increase in the price of butter from OP to OP 1 , then the demand for bread will also increase from OQ to OQ 1 .

Note: The above shown graphs are not demand curves. They only show the relationship between demand for a given commodity and price of the related good.

Demand is not affected by Change in Price of Unrelated Goods A commodity’s demand is only affected by a change in the price of related goods (substitute goods and complementary goods). If there is a change in the price of unrelated goods, then there is no impact on the demand for a given commodity. Unrelated goods are the goods which are not linked with the demand for a given commodity. For example, if there is an increase/decrease in the price of bottle, then there will be no impact on the demand for laptop.

By keeping other things constant, the relationship between the demand for a given commodity and the price of related commodities is known as Cross Demand. In simple terms, cross demand helps in knowing how much quantity of a given commodity will be demanded at different price levels of a related commodity (substitute good or complementary good). Cross Demand can be expressed as:

D x = f(P y )

D x = Demand for the given commodity

f = Functional Relationship

P y = Price of the related commodity (substitute or complementary)

Cross Demand can be either Positive or Negative

• In the case of substitute goods, cross demand is positive. It is because the demand for a given commodity varies directly with the prices of substitute goods.
• In the case of complementary goods, cross demand is negative. It is because the demand for a given commodity varies inversely with the prices of complementary goods.

The effect on the demand for a given commodity because of a change in the price of a related commodity is known as Cross Price Effect. In simple terms, the cross price effect originates from substitute goods and complementary goods. The effect of change in the prices of substitute goods and complementary goods can be explained as follows:

A. Change in Price of Substitute Goods

An increase or decrease in the price of substitute goods has a direct impact on the demand for a given commodity.

1. Increase in Price of Substitute Goods: When there is an increase in the price of substitute goods (say, coffee), the demand for the given commodity (say, tea) will also increase from OQ to OQ 1, with the same price OP. It results in a rightward shift in the demand curve of the given commodity (tea) from DD to D 1 D 1 .

2. Decrease in Price of Substitute Goods: When there is a decrease in the price of substitute goods (say, coffee), the demand for the given commodity (say, tea) will also decrease from OQ to OQ 1, with the same price OP. It results in a leftward shift in the demand curve of the given commodity (tea) from DD to D 1 D 1 .

B. Change in Price of Complementary Goods

An increase or decrease in the price of complementary goods has an inverse impact on the demand for a given commodity.

1. Increase in Price of Complementary Goods: When there is an increase in the price of complementary goods (say, butter), the demand for the given commodity (say, bread) will decrease from OQ to OQ 1, with the same price OP. It results in a leftward shift in the demand curve of the given commodity (bread) from DD to D 1 D 1 .

2. Decrease in Price of Complementary Goods: When there is a decrease in the price of complementary goods (say, butter), the demand for the given commodity (say, bread) will increase from OQ to OQ 1, with the same price OP. It results in a rightward shift in the demand curve of the given commodity (bread) from DD to D 1 D 1 .

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Gabriela Salinas and Jeeva Somasundaram

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

In April this year, Hein Schumacher, chief executive of Unilever, announced that the company was entering a “new era for sustainability leadership”, and signalled a shift from the central priority promoted under his predecessor , Alan Jope.

While Jope saw lack of social purpose or environmental sustainability as the way to prune brands from the portfolio, Schumacher has adopted a more balanced approach between purpose and profit. He stresses that Unilever should deliver on both sustainability commitments and financial goals. This approach, which we dub “realistic sustainability”, aims to balance long- and short-term environmental goals, ambition, and delivery.

As a result, Unilever’s refreshed sustainability agenda focuses harder on fewer commitments that the company says remain “very stretching”. In practice, this entails extending deadlines for taking action as well as reducing the scale of its targets for environmental, social and governance measures.

Such backpedalling is becoming widespread — with many companies retracting their commitments to climate targets , for example. According to FactSet, a US financial data and software provider, the number of US companies in the S&P 500 index mentioning “ESG” on their earnings calls has declined sharply : from a peak of 155 in the fourth quarter 2021 to just 29 two years later. This trend towards playing down a company’s ESG efforts, from fear of greater scrutiny or of accusations of empty claims, even has a name: “greenhushing”.

Test yourself

This is the fourth in a series of monthly business school-style teaching case studies devoted to the responsible business dilemmas faced by organisations. Read the piece and FT articles suggested at the end before considering the questions raised.

About the authors: Gabriela Salinas is an adjunct professor of marketing at IE University; Jeeva Somasundaram is an assistant professor of decision sciences in operations and technology at IE University.

The series forms part of a wider collection of FT ‘instant teaching case studies ’, featured across our Business Education publications, that explore management challenges.

The change in approach is not limited to regulatory compliance and corporate reporting; it also affects consumer communications. While Jope believed that brands sold more when “guided by a purpose”, Schumacher argues that “we don’t want to force fit [purpose] on brands unnecessarily”.

His more nuanced view aligns with evidence that consumers’ responses to the sustainability and purpose communication attached to brand names depend on two key variables: the type of industry in which the brand operates; and the specific aspect of sustainability being communicated.

In terms of the sustainability message, research in the Journal of Business Ethics found consumers can be less interested when product functionality is key. Furthermore, a UK survey in 2022 found that about 15 per cent of consumers believed brands should support social causes, but nearly 60 per cent said they would rather see brand owners pay taxes and treat people fairly.

Among investors, too, “anti-purpose” and “anti-ESG” sentiment is growing. One (unnamed) leading bond fund manager even suggested to the FT that “ESG will be dead in five years”.

Media reports on the adverse impact of ESG controversies on investment are certainly now more frequent. For example, while Jope was still at the helm, the FT reported criticism of Unilever by influential fund manager Terry Smith for displaying sustainability credentials at the expense of managing the business.

Yet some executives feel under pressure to take a stand on environmental and social issues — in many cases believing they are morally obliged to do so or through a desire to improve their own reputations. This pressure may lead to a conflict with shareholders if sustainability becomes a promotional tool for managers, or for their personal social responsibility agenda, rather than creating business value .

Such opportunistic behaviours may lead to a perception that corporate sustainability policies are pursued only because of public image concerns.

Alison Taylor, at NYU Stern School of Business, recently described Unilever’s old materiality map — a visual representation of how companies assess which social and environmental factors matter most to them — to Sustainability magazine. She depicted it as an example of “baggy, vague, overambitious goals and self-aggrandising commitments that make little sense and falsely suggest a mayonnaise and soap company can solve intractable societal problems”.

In contrast, the “realism” approach of Schumacher is being promulgated as both more honest and more feasible. Former investment banker Alex Edmans, at London Business School, has coined the term “rational sustainability” to describe an approach that integrates financial principles into decision-making, and avoids using sustainability primarily for enhancing social image and reputation.

Such “rational sustainability” encompasses any business activity that creates long-term value — including product innovation, productivity enhancements, or corporate culture initiatives, regardless of whether they fall under the traditional ESG framework.

Similarly, Schumacher’s approach aims for fewer targets with greater impact, all while keeping financial objectives in sight.

Complex objectives, such as having a positive impact on the world, may be best achieved indirectly, as expounded by economist John Kay in his book, Obliquity . Schumacher’s “realistic sustainability” approach means focusing on long-term value creation, placing customers and investors to the fore. Saving the planet begins with meaningfully helping a company’s consumers and investors. Without their support, broader sustainability efforts risk failure.

Questions for discussion

Read: Unilever has ‘lost the plot’ by fixating on sustainability, says Terry Smith

Companies take step back from making climate target promises

The real impact of the ESG backlash

Unilever’s new chief says corporate purpose can be ‘unwelcome distraction ’

Unilever says new laxer environmental targets aim for ‘realism’

How should business executives incorporate ESG criteria in their commercial, investor, internal, and external communications? How can they strike a balance between purpose and profits?

How does purpose affect business and brand value? Under what circumstances or conditions can the impact of purpose be positive, neutral, or negative?

Are brands vehicles by which to drive social or environmental change? Is this the primary role of brands in the 21st century or do profits and clients’ needs come first?

Which categories or sectors might benefit most from strongly articulating and communicating a corporate purpose? Are there instances in which it might backfire?

In your opinion, is it necessary for brands to take a stance on social issues? Why or why not, and when?

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Where climate change meets business, markets and politics. Explore the FT’s coverage here .

Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here

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