Elasticity Complements Substitutes
Elasticity: Complements and Substitutes
D. Buress, R. Jackson, J. Jones, P. Nelson, I. Skidmore
ECO/365
February 2, 2015
R. Caratao
Elasticity: Complements and Substitutes
This week our team was tasked with discussing the concepts of complementary and substitute products and their effects on supply and demand. Most of the discussions were centered on getting a true and valid understanding of the definitions for each of these economic scenarios.
Complements and Substitutes
As we looked at why some products become substitutes and why some complement each other we looked at a simple definition of the two. Simply put, complementary goods consider the use of two items, where using more of Good A requires the use of more of Good B. The team discussed the example of ink jet printers and their ink cartridges. One cannot be used without the other, therefore as the demand for one increases the demand for the other also rises. In economic terms, goods that are complementary exhibit a negative cross elasticity of demand.
We also discussed how when computers become less expensive then more are purchased, thus increasing the demand for peripherals, such as mice, monitors and software. This demand for peripherals drives up their price. This is one reason why companies "commoditize" their products complements. Commoditizing of products is the act of making a process, good or service easy to obtain by making it as uniform, plentiful and affordable as possible. If a business can effectively commoditize, then the demand for their product will increase, they will in turn be able to charge more, and thus enjoy higher profits. This concept of commoditizing products is used extensively in the software industry. They are banking on the complementary goods market.
In contrast to complementary goods, substitute goods, have a positive cross elasticity of demand. This means that demand for a product increases when the price for another product is increased and vice versa. In regards
D. Buress, R. Jackson, J. Jones, P. Nelson, I. Skidmore
ECO/365
February 2, 2015
R. Caratao
Elasticity: Complements and Substitutes
This week our team was tasked with discussing the concepts of complementary and substitute products and their effects on supply and demand. Most of the discussions were centered on getting a true and valid understanding of the definitions for each of these economic scenarios.
Complements and Substitutes
As we looked at why some products become substitutes and why some complement each other we looked at a simple definition of the two. Simply put, complementary goods consider the use of two items, where using more of Good A requires the use of more of Good B. The team discussed the example of ink jet printers and their ink cartridges. One cannot be used without the other, therefore as the demand for one increases the demand for the other also rises. In economic terms, goods that are complementary exhibit a negative cross elasticity of demand.
We also discussed how when computers become less expensive then more are purchased, thus increasing the demand for peripherals, such as mice, monitors and software. This demand for peripherals drives up their price. This is one reason why companies "commoditize" their products complements. Commoditizing of products is the act of making a process, good or service easy to obtain by making it as uniform, plentiful and affordable as possible. If a business can effectively commoditize, then the demand for their product will increase, they will in turn be able to charge more, and thus enjoy higher profits. This concept of commoditizing products is used extensively in the software industry. They are banking on the complementary goods market.
In contrast to complementary goods, substitute goods, have a positive cross elasticity of demand. This means that demand for a product increases when the price for another product is increased and vice versa. In regards
Bibliography: Colander, D. C. (2013) Microeconomics (9th ed.) New York, NY McGraw-Hill Irwin