The Market Mechanism

Complements and Substitutes

There are times when a change in one market will have an impact in another market. This occurs when there is a relationship between the two markets.

One situation in which this can occur is when two products are considered complementary. Complementary products exist when buying one product makes it more likely that you are going to buy the second product. Example of complementary products include:

Bread and Butter
A Car and Petrol
A Portable PlayStation and Games

In each case, when you buy one product, you are more likely to buy the other. This can help us to predict the actions of consumers in certain markets.

For example, if the price of cars fell, what do you think would happen in the market for petrol? It is very likely that the fall in the price of cars would mean that more cars would be sold. If this happens, then the new car owners will need to buy petrol. As a result, the demand for petrol will increase.

Another type of relationship exists when products are considered substitutes for one another. In this instance, we are looking at two products which satisfy the same need or want. Examples include:

Butter or Margarine
Cars or Public Transport
A PlayStation 3 or an Xbox 360

In each case, people are likely to choose one product or the other. If you spread margarine on your bread, you are unlikely to put butter on your bread as well. In this instance, we make a choice between the two products.

Once again, we can use this information to predict how consumers will react. If the price of a car increases, then fewer people will buy cars. This means that the demand for petrol will fall, because petrol is a complementary product. It also means that the demand for public transport could increase. This is because public transport is a substitute product - people still need to travel around the city, and if they don’t own a car, some of them will choose public transport. The end result is an increase in demand for the alternative.

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