Difference Between Complementary and Substitute in Economics
In practical economics, everything is interconnected, and it's important to know the difference between substitute goods and complementary goods. If a lot of hamburgers are sold, a lot of french fries will be sold as well. Thus, the demand for hamburgers has a significant impact on the demand for french fries; this is a simple example of complementary demand in economics.
As demand increases, so does price. In the case of hamburgers, if the price goes too high, people might start buying chicken sandwiches or salads for lunch. This reflects the economic principle of substitution goods.
Complementary goods are those that are often used together, such as motor vehicles and gasoline, or DVDs and DVD players. When the price of one good declines (or increases) and the demand for a related good increases (or decreases), then the two goods are considered complementary. For example, if the price of computers increases and the demand for software declines, computers and software can be considered complementary.
To distinguish between substitute and complementary goods, consider that substitutes are goods that are used in place of each other. Examples include CDs and digital music files or music streaming services, or ice cream and frozen yogurt. If a price increase for one good leads to an increase in demand for a related good, then the two goods are considered substitutes. An increase in beef prices, for example, followed by higher demand for chicken or pork, indicates that chicken or pork represent substitutes for beef.
Complementary goods usually have the equivalent of senior and junior partners in the relationship. The "junior" partner has a compelling interest in the success of the "senior" partner, but must be prepared for changes in the market. For example, if the sale of hamburgers declines, the producers of potatoes have a significant interest in trying to boost chicken sandwiches as the substitute, rather than salads, as french fries are a natural complement to hot sandwiches, but not to salads.
In some cases, the "junior" partner must adapt to rapid changes in the marketplace. Makers of electronic software have had to adapt from computer platforms to smart phones and tablets. Eventually, the changes themselves can become complementary. New software can require new platforms, while the new platforms make possible even newer software. The computer industry has been marked by a dizzying array of evolving shifts in both complementary and substitute goods.
During the record gasoline prices in 2007, dealers of motor scooters, such as the Vespa, reported huge jumps in sales, and even waiting lists for new scooters. Their superior gas mileage made scooters a substitute for cars and trucks. In this case, the increased price of the "junior" partner in an economically complementary relationship, drove the substitution of the "senior" partner.