Theory question 107
Theory of Demand(a) Explain with examples the terms competitive demand and complementary demand.
(b) With the aid of diagrams, analyse the effect of a decrease in the import duty on cars on the price and consumption of petrol.
Show the model answer
(a) Competitive demand: goods that are substitutes, so a rise in the price of one increases demand for the other, e.g. tea and coffee, Coca-Cola and Pepsi. Complementary (joint) demand: goods used together, so a rise in the price of one reduces demand for both, e.g. cars and petrol, torch and battery.
(b) Lower import duty makes cars cheaper, so more cars are bought (diagram 1: car supply shifts right, price falls, quantity rises). Cars and petrol are complements, so demand for petrol increases (diagram 2: petrol demand shifts right from D0 to D1); the price of petrol rises and more petrol is consumed.
Complementary goods: cheaper cars mean more demand for petrol.