DIFFERENCE BETWEEN SUBSTITUTE GOODS AND COMPLEMENTARY GOODS
Substitute goods are those which can be used in place of each other for the satisfaction of some want e.g. tea and coffee, coke and limen Soda, etc. There is a direct relationship between the price of substitute goods and given commodity, other things remain constant and vice versa. It implies as the price of substitute goods increases, the quantity demanded of a given commodity starts increasing.
For example, If the price of coke increases, it will result in more Qd for Limca as Limca will become cheaper as compared to coke. Thus the price of substitute goods directly affects the Qd for the given commodity.
Complementary goods are those which are used together to satisfy a specific need such as cars and petrol, shoes and polish, pencils and erasers, etc. there is a negative relationship between prices of complementary goods and quantity demanded of the given commodity. It implies that as the price of complementary goods rises, the quantity demanded of the given commodity starts declining, other things being constant and vice versa.
For example, as the price of shoes starts increasing, the quantity demanded of polish starts decreasing as they will become expensive when used together. So, the demand for a given commodity is inversely affected by the price of complementary goods.
Differences Between Substitute Goods and Complementary Goods
- Substitute goods are independent to each other while as complementary goods are inter-dependent.
- If the price of one good increases, the demand of its substitute good increases while on the other hand if the price of good increases, the demand its complementary good decreases.
- Cross elasticity of the substitute goods will be positive while as cross elasticity of complementary goods is negative.
- Tea and Coffee is an example of substitute goods while as car and petroleum is an example of complementary goods.
- Complementary goods are mostly sold in combination while as substitute goods are mostly sold in singularity.