Economics Explained

Substitutes and complements are related goods of a product. They are very important because they can change the demand for a product. They affect your life every day without you even knowing. We can define one of these fancy words as follows: a substitute is a thing that can be used in place of another thing. Eyeglasses and contact lenses are perfect examples. If the price for one thing is low, the demand for the other thing reduces. For example, imagine that you are in a store that sells both eyeglasses and contact lenses. Now, you see that the price of contact lenses is four times the price of eyeglasses. Then, you automatically buy the eyeglasses. This is the simple way to understand the 'cross-elasticity of demand'.

Now, there's this other term called complements. Complements are basically stuff that is bought together, meaning it wouldn't make sense to use one without the other. So, of course, buying one item more leads to buying the other item more. Complements are stuff like notebooks and pens; bread and butter; breakfast cereal and milk; and the five-way combination of bacon, lettuce, tomato, mayonnaise, and bread. For instance, if the price of breakfast cereal increases, the demand for breakfast cereal decreases along with the demand for milk. Also, if the prices for notebooks went up, the demand for complementary goods like pens would go down. This is also true when the opposite happens: a lower price for an item increases the demand for the complementary good.