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Sample Problem: Substitutes

All of the following pairs of goods are substitutes except

-We observe the price of soda decreases and the demand for iced tea decreases.

-We observe the price of steak increases and the demand for chicken increases.

-We observe the price of bicycles increases and the demand for helmets decreases.

To find the answer to this question, we must first know that two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change. When the price of soda decreases the demand for iced tea decreases. These goods are substitutes because the demand for ice tea is moving in the same direction (decreasing) as the price of soda. Intuitively this makes sense because you’ll choose to drink one or the other with your meal – probably not both! When the price of steak increases the demand for chicken increases. Again, these goods are substitutes because the demand for chicken is moving in the same direction (increasing) as the price of steak. This makes sense, because generally you won’t have chicken and steak for dinner, unless you are at a buffet or really like meat. For most people, chicken is a substitute for steak. When the price of bicycles increases, the demand for helmets decreases. These goods are not substitutes, because the increase in the price of one good (bicycles) causes a decrease in demand for the other good (helmets). These goods are complementary. Two goods are complements when a change in the price of one causes an opposite shift in the demand for the other. Goods that are complements are typically consumed together. This makes sense, because many people purchase a bike helmet to go along with their new bike.

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