Law of Demand and Price of Related Products

Law of Demand Recap

• Basic Principle: If the price of a product increases, the quantity demanded decreases, and vice versa.
• Assumption: Other factors are held equal, allowing movement along the demand curve.

Influence of Related Products

• Key Question: What happens if factors assumed constant change?
• Focus: Price of related products and its effect on demand.

Scenario 1: Substitutes

Definition

• Substitutes: Products that can replace each other.
  • Example: Other e-books as substitutes for one’s e-book.

Impact

• If the price of substitutes rises:
  • The e-book becomes more desirable.
  • Demand curve shifts to the right (increase in demand).
• If the price of substitutes falls:
  • Demand curve shifts to the left (decrease in demand).

Scenario 2: Complements

Definition

• Complements: Products used together with the main product.
  • Example: Kindle as a complement to an e-book.

Impact

• If the price of complements rises:
  • Fewer people can buy or use the complement, reducing demand for the e-book.
  • Demand curve shifts to the left (decrease in demand).
• If the price of complements falls:
  • Demand curve shifts to the right (increase in demand).

Understanding Demand vs. Quantity Demanded

• Demand: Entire relationship/curve, which shifts if factors other than price change.
• Quantity Demanded: Specific quantity for a specific price, holding other factors constant.

Key Takeaways

• Changes in the price of related products (substitutes or complements) can shift the entire demand curve.
• Always consider whether related products are substitutes or complements and how their price changes will affect the demand for the main product.
• Encourage exploring scenarios and drawing demand curves to visualize these changes.