A consumer walking through the grocery store intent on purchasing the necessary ingredients for a peanut butter and jelly sandwich notices the prices for all brands of peanut butter are higher than expected. Will this consumer choose to not purchase peanut butter and buy bread and jelly only? By raising the price of peanut butter the retailer risks selling less bread and jelly in addition to reduced peanut butter sales. If the same consumer went to another grocery store and found only one brand of peanut butter priced higher than the others, the elasticity principle of substitution will apply. The consumer will pick a different brand of peanut butter and follow his original plan to purchase bread and jelly.
Complementary products are, goods used in conjunction with other goods (Colander, 2013, pg.136). The law of elasticity in relation to complementary products shows that when the price of a product increases or decreases it will have an impact on the demand for complementary products, in this case resulting in lower sales of those products. In the example above the desired meal is a peanut butter and jelly sandwich. The elasticity in the price of peanut butter will force the consumer to spend more money and buy the peanut butter with its complementary products of jelly and bread. If the elasticity of the price increase is too great for the consumer and the consumer chooses to purchase tuna fish, jelly manufacturers will see reduced sales. Manufacturers and retailers must understand the relationship between their products and the complementary products of their product. Another example of complementary products is an ink jet printer and the ink cartridges (Living Economics, 2013). The law of demand states that when the price of an inkjet printer falls, then the quantity demanded will rise.
When consumers purchase more printers, then more ink will be purchased. On the other hand, when the price of the printer increases, quantity demanded will decrease leading to fewer printer purchases, also leading to a reduction in ink cartridge purchases. In both instances when prices increase consumers will look for substitute products.
Demand for a substitute product is determined by timeframe, the degree of luxury, and the importance on ones budget (Colander, 2013, pg. 130). A substitute is a good with a positive cross elasticity of demand. In practice, this means that its demand will increase when another products price increases. For example, Coke and Pepsi represent major rivals, and when Coke introduces a price increase, the need and demand for Pepsi will increase. Consumers will substitute when one product in competition with another chooses to increase their price, as shoppers typically choose the lower price. The more substitutes a good has, the more elastic is its demand (Colander, 2013, pg. 131). Some consumers will agree that generic store brand products easily replace more expensive name brand products. When the prices for name brand products rise, consumers will switch to the generic brands in order to save money. The demand for the name brand products is very elastic at that point.
Cross-price elasticity of demand is defined as the percentage change in demand divided by the percentage change in the price of a related good (Colander, 2013, pg. 136). The result of positive cross-price elasticity is represented by goods consumers substitute when their desired product is too expensive. Consumers will find substitutes for most products, and competition is a good thing for consumers. When the result of cross-positive elasticity is negative, complementary products will see a decrease in demand for those products.
Colander, D. C. (2013). Microeconomics (9th ed.). New York, NY: McGraw- Hill/Irwin. Living Economics, (2013). Complements and substitutes. Retrieved from http://livingeconomics.org/article.asp?docId=289