Complementary and Substitute Products: Demand and Quantity

Demand and Quantity Demanded

There is a clear distinction between demand and quantity demanded; furthermore, they have their own significance in the economics arena. In economics, the term demand refers to the will associated with purchasing a product, which one can afford, meaning that the price must be contained within the fiscal reach of the consumer. Demand is also a combination of aspiration to possess something, the capability to pay for it, and the willingness to reimburse. An example is the ability of citizens to pay for education, as well as to buy basic-food staff. Quantity demanded (QD), on the other hand, refers to the entire number of commodities demanded at any one moment, for instance, people buying 3000 laptops when the price is $500 (Baumol and Blinder, 2008). QD depends on the worth of products, not considering market stability.

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Substitutes and Complement Products

Substitutes are products that can replace each other and still gratify the desires that the intended product is aimed at addressing (McKenzie and Dwight, 2006). A notable example is butter and margarine, which meet the same purpose as the consumers. It is notable that changes in the price of one product will have a significant demand on the other. Complement products refer to a set of goods consumed jointly. A sole example is the printer and ink cartridges, which must be used together. Other examples include camera and film, together with computer and Microsoft programs. The appreciation in the price for one product results in depreciation in demand of its complement.

The Difference between Demand and Quantity Demanded

Understanding the difference between the two aspects is critical in avoiding errors in economics. Demand verifies the marketplace situation, recorded at usual intermissions. Various types of market equilibrium affect demand. An increase in price usually lowers demand; consequently, a decline in price escalates demand. A demand curve shows a sloping arc. On the other hand, QD is a pointed demand. It shows the amount demanded at a point along the demand curve; therefore, it does not depend on the market equilibrium. It is significant in determining investment activities. In addition to that, the quantity demanded can only be calculated after-sales. It is, therefore, crucial to emphasize that demand depends on the quantity demanded (Myers, 2004).

The change in the movement and shifts along the demand curve are notable. Demand changes with a change in factors affecting it. These factors are the consumer’s income, their likes, and their requirement for both substitute and complementary goods. The curve will shift to the left or right of the initial demand curve. When the factor causes an increase in demand, then the curve will shift outwards and vice versa. Quantity demanded, which is a pointed demand, usually moves along the demand curve as opposed to shifting in demand (Gwartney et al., 2008). Any change in the demanded quantity of commodities relocates on the demand curve.

Explanation and Analysis of Substitute and Complement Products

Substitutes are products that can be used in place of another. Complements are products used together. It is normal for a demand curve to shift if there is an alteration in quantity demanded, which largely depends on substitute and complement goods. In the case of butter and honey, which are complementary products, a change in the price of one product alters the QD of the other ((McKenzie and Dwight, 2006). For instance, an increase in the price of honey will result in the reduction of QD for butter. It is vital to note that there will be a negative shift in the demand curve towards the left with reference to the original curve (Myers, 2004). This means that, at any point, the demand for butter will be lower than its original demand before the price of honey increased. Consequently, a decrease in the price of honey will automatically lead to a swell in demand for butter. This implies that, as many people use honey, they have to use butter as well since these products go together. This situation will shift the curve to the right side of the arc.

However, the rule does not apply in some situations. An increase in cost might result from enhanced performance, and this will result in a reverse shift in the demand for the complement good. Enhanced action of honey will lead to an increase in its price, but this will not lower the demand. Increased demand for it will subsequently lead to an increased demand for butter, which is a complementary good. This will see the demand curve for butter shifting to the right of the initial curve (McKenzie and Dwight, 2006). It is thus noted that the demand for a complementary product may be affected by several factors, and an increase in the price of its complement does not necessarily lead to reduced demand. Improved performance of a complement good is a significant factor that may reverse the general rule of the price and demand of supplementary goods.

The same scenario in complementary goods applies to the substitute goods, but it is reverse. An appreciation in demand for a commodity causes an appreciation in demand for a substitute. This is because they tend to perform the same functions. Mobil and BP are fuel products for automobiles; therefore, an increase in the price of one product will escalate the quantity demanded of the substitute. With an increase in the price of Mobil, the demand for BP also increases. In this case, the demand curve for the Total will shift to the right of the original curve. This will result in an increase in the QD of the Total. An extrapolated line at any point on the demand curve will show that the quantity of Total demanded, when the price of Mobil increases, is always higher than the initial value. It is imperative to assert that an improved performance of a substitute may shoot up its price. The improved performance of Mobil will further attract people to continue utilizing it despite the increased price. In this case, the demand for Mobil will shift to the right of the original curve, despite the elevation of the price. People tend to enjoy hybrid products since it has additional functions like cleaning of fuel injectors, as well as increased fuel efficiency.

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Elasticity of Demand

Elasticity is an important factor in economics. It is the ratio of the percentage change in one demand variable to change in the other demand variable. There are several types of elasticities of demand. These include price, income, and cross elasticity. Price elasticity explains a variation in the magnitude of demand with reference to the alteration in cost along a demand curve. An increase in price by 2%, which results in a 1% reduction in the demand, results in price elasticity of about 0.5. A perfectly elastic curve is where the value is > 1, and the demand curve is practically horizontal. This means that the magnitude of demand is exceptionally responsive to any insignificant alteration in price. This elasticity affects returns since the rise in price results to diminish revenues and vice versa. Perfectly inelastic means that the adjustment in magnitude demanded is below the change in cost (McKenzie and Dwight, 2006). This results in a near-zero elasticity; consequently, the curve is approximately upright. Unitary elasticity is when the value is one, meaning that both changes in quantity demanded and the price is equivalent. There are several factors influencing price elasticity, including the availability of substitute goods, degree of necessity, and income proportions.

Income elasticity measures the proportion change in demand for a product resulting from percent alteration in income or earning. The demand curve relocates to reflect a fluctuation in consumers’ income. An appreciation in income by 10% may result in an appreciation in demand for fresh fruits by 4%. The income elasticity is considerably high in luxurious goods compared to necessitous goods. Normal necessities include instant coffee, fresh vegetables, and milk. Luxury products include designed clothes as well as wines. However, income elasticity of demand is negative for inferior goods like cigarettes and tinned meat.

Demand cross elasticity gives the percentage change in the quantity demanded a product following a price fluctuation in another. The concept of complementary and substitute goods arises from this. An elevated price of coffee by 10%, which subsequently increases QD for tea by 2%, results in cross elasticity of +0.2. It is imperative to note that cross-elasticity for substitute goods is usually positive. Furthermore, the strength of the relationship between goods determines the elasticity. Twin close substitutes will always have a sturdy positive elasticity. Tea and coffee have a feeble union, as opposed to Tesco and Sainsbury, which have tough relations. Consequently, close-complementary products will have a sturdy negative elasticity. Distant products normally have zero cross elasticity since there is no association between them.

Factors affecting demand

More than a few factors have been outlining in the text, but still, some are missing. Any factor that may lead to a shift in the demand curve impacts demand. An increase in disposable earnings due to amplified paycheck or diminished taxes will lead to augmented demand for various goods and vice versa. The superior quality of a product, for instance, improved performance of instant coffee, will shift the demand curve right wise. However, the pitiable quality of a fuel brand will reduce its demand. Advertisement usually instills a sense of confidence in the consumer, thus increasing demand for the product. An increase in the price of a substitute translates to an elevated demand for its alternative. However, a fall in the price of a complement will result in increased demand for its blend. Weather sometimes determines demand; for example, people will tend to buy umbrellas during rainy seasons. Another factor is the future expectations of the price. Demand rises with expectations of a future rise in price. There is a converse association between price and demand, where an increase in price will cause a fall in demand and vice versa. Consumers’ preferences are also a significant factor in demand, where the high preference for a product associates with high demand for it. Lastly, a high number of consumers in a market will lead to soaring demand if other factors are unvarying.

Conclusion

Demand is one of the pillars of economics, and it determines several aspects of the market. Demand is not complete when there is no will and the ability to pay for the product. Demand depends on price and supply, among other parameters. The quantity demanded is a key aspect of demand. It is independent of market equilibrium. The substitute and complement products are key players in demand and QD. A change in price in a substitute or complement good alters the quantity demanded of another related product. The elasticity of demand is another fundamental aspect of demand since a proportionate change in one factor affects the demand for a product. There are price and income as well as cross elasticity of demand in economics. Several factors do affect the demand for a product, and these include weather, price expectations, and the consumer count in the marketplace.

References

Baumol, William and Blinder A. (2008) Macroeconomics: Principles and Policy. 11th edition. Florence, Cengage Learning.

Gwartney, James et al. (2008) Economics: Private and Public Choice. Florence, Cengage Learning.

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McKenzie, Richard and Dwight R. (2006) In defense of monopoly: how market power fosters creative production. Michigan, University of Michigan Press.

Myers, D. (2004) Construction economics: a new approach. Oxford, Taylor and Francis.

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