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Meaning and Theory of Complementary Goods
Let’s explain complementary goods in the simplest way possible. Complementary goods are those goods where the demand for one good creates the demand for another good as well. To make it even simpler, complementary goods go hand in hand which means that if there is a requirement for one good the second one is also needed.
These types of goods are called Complementary Goods. Examples of Complementary Goods are Pencils & erasers, Printers & Ink, Bread & Butter, and Car & Petrol, etc.
It means that if the demand for one product increases the demand for the second product also rises. However, it should be noted that if the price of a good rises the demand for the other good decreases and thus there is a shift in the demand curve. This results in a cause-and-effect relationship.
For example, if the price of petrol increases then the demand for the car will gradually fall. This analysis is done under the assumption that the market situations are constant and there are no other complementary products available. This a hypothetical situation for which the study of demand elasticity is further needed.
Criticisms
There were many criticisms of this theory as the critic pointed out that the fact that the market cannot be constant and is dynamic in nature. It is always subjected to economic and financial changes, both external to the country as well as internal. This theory holds its weight for inferior goods. If an individual wants to buy a car no market conditions will stop him to buy that product.
Critics also opine that tastes and preferences are significant in buying or demand behavior. If the consumer likes the taste of say for example a particular Bread no matter how much the price of it rises, the consumer will still buy that product.
Thus the analysis of the complementary goods is applicable to those people who have budgets to be maintained, this is food for thought for the analytical mind.
Figure 1. Complementary Goods
Let’s understand the above graph.
A) The x-axis represents the price of the product
B) Y-axis represents the quantity of that product
C) Supply of both products is the same and is constantly maintained
D) If the price of one product shifts from P1 to P2 the quantity that would be demanded will shift from Q1 to Q2, assuming the supply to be constant
E) There is a clear shift in the demand curve and this is how a marginal increase in the price would entirely shift the demand curve
This is how complementary goods affect each other. They are always paired and manufacturers always try to make a such product that goes hand in hand. Why so? This is done so that there are lower chances of the demand for his product reducing.