Substitutes vs. Complements

What Is Substitutes vs. Complements?

Substitutes and complements describe how two goods relate through their prices. Substitutes are goods that can be used in place of one another, such as tea and coffee: when the price of one rises, demand for the other increases and its curve shifts right, because buyers switch toward it. Complements are goods typically used together, such as cars and gasoline: when the price of one rises, demand for the other decreases and its curve shifts left. These relationships are the prices of related goods determinant of demand, and they are measured by cross-price elasticity, which is positive for substitutes and negative for complements.

Why It Matters

Recognizing whether goods are substitutes or complements is essential for predicting how a price change in one market ripples into another. A jump in the price of beef raises demand for chicken, its substitute, while a jump in the price of gasoline can dampen demand for large vehicles, its complement. Firms use these links to set prices and design bundles, and analysts use cross-price elasticity to quantify them and even to define the boundaries of a market. Because related-goods prices are one of the five demand shifters, changes in them move whole demand curves, making the substitute-complement relationship a key channel through which markets are connected to one another.