What are Substitute Goods and Complementary Goods

You may find many goods and services which have a close connection with other goods and services, for example, bread and butter, car and petrol, tea and coffee, apples and oranges, pen and ink etc. In these type of goods, the change in the price of one good has an effect on the quantity bought of the other good. These are called related goods. These can be of the nature of substitutes i.e goods which can be used in place of each other; or they can be of the nature of complementary goods which are goods used along with each other. 

Substitute Goods

Substitutes goods are those goods which can be used in place of one another, in the sense that they satisfy the same want of the consumer. Like tea and coffee, apples and oranges etc.

Therefore, in case of substitute goods, the change in the price of one good has an impact on the demand for the other good. 

Taking the example of two goods, tea and coffee, assume that the price of coffee decreases. What effect will it have on the demand for tea? Let’s consider a consumer who is rational and doesn’t differentiate between hot beverages and takes price as a determinant for buying them. So, if the price of coffee decreases and becomes less than tea, a rational consumer would want to buy more of coffee instead of tea as coffee has now become relatively cheaper compared to tea. In other words, the consumer would want to replace tea with coffee. Therefore, as the price of coffee falls, the quantity bought of tea decreases. In other words, as the price of substitute good falls, the quantity demanded of the other good falls. 

Similarly, if the price of coffee rises and becomes more than tea, a rational consumer would want to replace coffee with tea, as tea is now cheaper compared to coffee. Therefore, as the price of coffee rises, the quantity demanded of tea increases. In other words, as the price of substitute good rises, the quantity demanded of the other good rises.

We can generalize it by taking two substitute goods X and Y. We can conclude that when the price of X falls, the quantity demanded of Y falls because X becomes relatively cheaper than Y and people start substituting X in place of Y. In a similar way, when the price of X rises, the quantity demanded of Y rises because X becomes relatively expensive than Y and people start substituting Y in place of X. A rational consumer will substitute the expensive good for the cheaper good.

Perfect Substitutes and Imperfect Substitutes

Goods can be substituted with varying degrees. Substitutes can be perfect or imperfect. A perfect substitute is one which is exactly the same as the other good and consumer finds it hard to distinguish one from the other. A perfect substitute gives the same satisfaction or utility as the other good. An example can be a One Rupee note being a perfect substitute for one rupee note. Coffee from brand A and coffee from brand B. 

Whereas, an imperfect substitute is one which is similar but not exactly the same as the other, in the sense that the consumer can notice the differences between them. Still, they can be used to satisfy the same want. For example a car and a bike. Both satisfy the same want of reaching a destination but the consumer can differentiate between a car and a bike. Hence, they are not perfect substitutes.

Whether the good is a perfect substitute or an imperfect substitute also depends on how the consumer perceives the good. For example, a person desiring a hot beverage may be ok with either tea or coffee and perceives them to be perfect substitutes. Whereas, a coffee lover will look at tea as an imperfect substitute for coffee. Hence, the same good can be a perfect or an imperfect substitute depending upon the consumer.

Complementary Goods

Complementary goods are goods which are used together. Goods used together or jointly in this way add value to the main product. Complementary goods have little value when used alone. Therefore, complementary goods are demanded jointly. For example, car and petrol, pen and ink, computer and computer software, bread and butter, phone and charger, printer and ink. 

The change in the price of petrol has an impact on the demand for cars. Assume that the price of petrol decreases. What effect will it have on the demand for cars? If the price of petrol decreases, a rational consumer would want to buy more cars. Therefore, as the price of petrol falls, the quantity demanded of car increases.

In other words, as the price of the complementary good falls, the quantity demanded of the other good rises. Similarly, if the price of petrol rises, a rational consumer would want to reduce the buying of cars. Therefore, as the price of petrol rises, the quantity of cars decreases. So, we can say that as the price of the complementary good rises, the quantity demanded of the other good falls. 

We can generalize it by taking two complementary goods X and Y, and conclude that when the price of X rises, the quantity demanded of Y falls. In a similar way, when the price of X falls, the quantity demanded of Y rises.

Strong and Weak Complementary Goods

Goods can be strong complements to each other or weak complements.

Strong complementary goods are those which are always used along with each other and it is useless to use one good without the other. For example a right pair shoe and left pair shoe are perfectly complementary to each other. The right pair of shoe has no use without the left pair. Printer and ink, phone and charger are other examples of strong complementary goods. 

Weak complementary goods are those which can be used with an other alternative in case one good is not available. For example bread and butter are not strong complements because if the butter is not available, that bread can also be used with jam or cheese. 

Importance of Substitute and Complementary Goods in Economics

The presence of substitutes and complementary goods play an important role in consumers' and producers' day to day decision making.

Substitute goods provide consumers with choice in the market. In case the price of one good rises, consumers have the option of switching to alternate goods which satisfy the same want. Substitute goods help encourage competition in the market and keep the prices in check.

Complementary goods give the producers an opportunity to choose the price of the complementary goods in such a way which benefits them. Producers may bundle the goods together or sell them in such a way that the price of one good is higher, knowing that the consumers will use the goods jointly. For example printers and ink. The price of the printers is kept low whereas the price of printer ink is allowed to rise, since producers know there is no use of the printer without the ink. 

Key Points

• Substitute goods can be used in place of one another. They satisfy the same want of the consumer, for example,  tea and coffee are common examples of substitute goods. 
• In case of substitute goods, when the price of one good increases, the quantity demanded of the other good increase as this good becomes relatively cheaper compared to the other one. 
• Complementary goods are used together. Goods used jointly add value to the main product. Car and Petrol, pen and ink are common examples of complementary goods.
• In case of complementary goods, the rise in price of one good leads to a fall in the quantity demanded of the other good as the goods are demanded jointly.