Prices Of Related Goods

A change in the price of a related good may either increase or decrease the demand for a product, depending on whether the related good is a substitute or a complement.

• A substitute good is one that can be used in place of another good.

• A complementary good is one that is used together with another good.

Substitutes Beef and chicken are examples of substitute goods, or simply substitutes. When the price of beef rises, consumers buy less beef, increasing the demand for chicken. Conversely, as the price of beef falls, consumers buy more beef, decreasing the demand for chicken. When two products are substitutes, the price of one and the demand for the other move in the same direction. So it is with pairs such as Nikes and Reeboks, Colgate and Crest, Toyotas and Hondas, and Coke and Pepsi. So-called substitution in consumption occurs when the price of one good rises relative to the price of a similar good.

Complements Complementary goods (or simply com lements) are goods that are used together and are usually demanded together. If the price of gasoline falls and, as a result, you drive your car more often, the extra driving increases your demand for motor oil. Thus, gas and motor oil are jointly demanded; they are complements. So it is with ham and eggs, tuition and textbooks, movies and popcorn, cameras and film. When two roducts are com lements, the rice of one good and the demand for the other good move in opposite directions.

Unrelated Goods The vast majority of goods that are not related to one another are called inde endent goods. Examples are butter and golf balls, potatoes and automobiles, and bananas and wristwatches. A change in the price of one does not affect the demand for the other.

Expectations Changes in consumer expectations may shift demand. A newly formed expectation of higher future prices may cause consumers to buy now in order to "beat" the anticipated price rises, thus increasing current demand. For

Part One • An Introduction to Economics and the Economy example, when freezing weather destroys much of Florida's citrus crop, consumers may reason that the price of orange juice will rise. They may stock up on orange juice by purchasing large quantities now. In contrast, a newly formed expectation of falling prices or falling income may decrease current demand for products.

Similarly, a change in expectations relating to future product availability may affect current demand. In late December 1999 there was a substantial increase in the demand for gasoline. Reason? Motorists became concerned that the Y2K computer problem might disrupt fuel pumps or credit card systems.

Finally, a change in expectations concerning future income may prompt consumers to change their current spending. For example, first-round NHL draft choices may splurge on new luxury cars in anticipation of a lucrative professional hockey contract. Or workers who become fearful of losing their jobs may reduce their demand for, say, vacation travel.

In summary, an increase in demand—the decision by consumers to buy larger quantities of a product at each possible price—may be caused by:

• A favourable change in consumer tastes

• An increase in the number of buyers

• Rising incomes if the product is a normal good

• Falling incomes if the product is an inferior good

• An increase in the price of a substitute good

• A decrease in the price of a complementary good

• A new consumer expectation that prices and income will be higher in the future

You should "reverse" these generalizations to explain a decrease in demand. Table -4 provides additional illustrations of the determinants of demand. (Key Question 2)

^TABLE 3-4^ DETERMINANTS OF DEMAND: FACTORS THAT SHIFT THE DEMAND CURVE

Determinant Examples

Change in buyer tastes Physical fitness rises in popularity, increasing the demand for jogging shoes and bicycles; Latin American music becomes more popular, increasing the demand for Latin CDs.

Change in number of buyers A decline in the birthrate reduces the demand for children's toys.

Change in income A rise in incomes increases the demand for such normal goods as butter, lobster, and filet mignon while reducing the demand for such inferior goods as cabbage, turnips, and inexpensive wine.

Change in the prices of A reduction in airfares reduces the demand for bus transportation related goods (substitute goods); a decline in the price of compact disc players increases the demand for compact discs (complementary goods).

Change in expectations Inclement weather in South America creates an expectation of higher future prices of coffee beans, thereby increasing today's demand for coffee beans.

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