Macroeconomics
● Prices of Related Goods or Services: The price and availability ofrelatedproductsinfluence demand. There are two types of related goods: ■ Substitutes: Twogoodsareconsideredsubstituteswhentheincreaseinthepriceofone good results in an increase in the demand for the other because they both serve the samefunction.Thismeansonegoodcanreplacetheother.Forexample,anincreasein the price of Pepsi encourages consumers to buy more Coca-Cola instead. 1. Price of good A increases → demand for good B increases ⇒ contraction along the demand curve of good A (decrease in quantity demanded of A due to a change in price) ⇒ rightwardshiftofthedemandcurveofgoodB(increaseindemandsinceit’s the price of good A that changed, not its own price). 2. Price of good A decreases → demand for good B decreases ⇒ extensionalongthedemandcurveofgoodA(increaseinquantitydemanded of A due to a change in price) ⇒ leftward shiftofthedemandcurveofgoodB(decreaseindemandsinceit’s the price of good A that changed, not its own price). Assuming goods A and B are substitutes, we can deduce the following:
■ Complements: Thesegoodsarealsosaidtohave a joint demand. They are usually consumed together as they complement each other like cars andpetrol,tennisballsandrackets,andso on. In thiscase,theincreaseinthepriceofone good reduces the demand for its complement and vice versa.
Assuming goods C and D are complements, we can deduce the following: 1. Price of good C increases → demand for good B decreases ⇒ contraction along the demand curve of good C ⇒ leftward shift of the demand curve of good D. 2. Price of good C decreases → demand for good D increases ⇒ extension along the demand curve of good C ⇒ rightward shift of the demand curve of good D.
Summary: Movement vs. Shift in Demand
↑ Price →Movement: Contraction, Left (quantity demandeddecreases). ↓ Price →Movement: Extension, Right (quantity demandedincreases).
Price Change
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