Answer to Question #247376 in Marketing for Joy

Question

Assume the increase in the price of apples
decreased the quantity demanded of vanilla
ice cream. Identify if these two products are
substitutes or complements

Answer 1

Discussion

A substitute good is a similar product that can be used instead of another, that is, it is similar enough to be used for the same function. When the price of one substitute good goes up, the demand for the other substitute also goes up. This is known as positive cross price elasticity. Substitute goods ensure there is a competitive environment. This is important because it helps keep prices down, and quality up which means when the price of one good goes up, the demand for a substitute good will increase.

On the other hand, a complementary good is a product or service that adds value to another. In other words, they are two goods that the consumer uses together. A complementary good can add value to the initial product.

The extent to which two products are substitutes or complements can be measured by calculating their mutual cross elasticity of demand. The cross elasticity of demand measures the percentage change in quantity demanded of the product that occurs in response to a percentage change in price of a substitute good. If the cross elasticity of demand is positive, the products are substitute goods. On the other hand, if cross elasticity is negative, the products are complements.

 

In this case, apples and vanilla ice cream are compliments and not substitutes. A complementary good is a good that adds value to another and in this scenario, vanilla ice cream is adding value to the apples.

Complementary Goods have a negative relationship with each other which means when the price of product A increases, demand for product B falls. This is because fewer people buy product A due to the higher price. As a result, fewer people are also buying product B, which only adds value to product A. This is known as negative cross-elasticity of demand. This is the reason why increase in the price of apples decreased the quantity demanded of vanilla ice cream.

Reference

Kojima, K. (1975). International trade and foreign investment: substitutes or complements. Hitotsubashi Journal of Economics, 16(1), 1-12.