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:

1. Always consider the cost of substitution – there might be switching costs for consumers if they opt for a new brand
2. Some products are close substitutes with a high (positive) cross price elasticity of demand
3. 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