Theory question 103
Price Determination(a) Distinguish between complementary goods and substitute goods.
(b) Using diagrams, explain how a decrease in the supply of meat, other things being equal, will affect the equilibrium price and quantity of: (i) meat; (ii) fish.
Show the model answer
(a) Complementary goods are used together, so demand for one depends on the other (e.g. car and petrol); substitute goods can be used in place of each other, so they compete (e.g. meat and fish).
(b)(i) Meat: supply shifts left (S0S0 to S1S1) with demand unchanged; equilibrium price rises (P0 to P1) and quantity falls (q0 to q1).
(ii) Fish: dearer meat makes consumers switch to fish, so demand for fish shifts right (D0D0 to D1D1) with supply unchanged; equilibrium price and quantity of fish both rise. Two labelled diagrams.
Meat and fish are substitutes.