Complementary Goods:


Complementary goods are goods that are used, or demanded, together. With complementary goods, the price of one good and the demand for the other move in opposite directions. For example, cars and gas are complements of each other since you need gas to work a car. If the price of gas skyrockets, then the demand for cars decreases. Another example of complementary goods are peanut butter and jelly (somewhat arguable). Many people believe that inorder to have a true PB & J you need just that, peanut butter AND jelly, but if the price of jelly jumped to $50,000 a jar then the demand for peanut butter would decline significantly. This would cause a lot of unhappy sandwich lovers.

A specific way to decide if two goods are complements or substitues is to use cross elasticity of demand. This formula takes the percentage change in quantity demanded of product X divided by percentage change in price of product Y. By plugging in numbers to this formula we are given a clear idea of what type of good it is. In order to be a complementary good the answer to cross elasticity must be negative. A final example of complementary goods are movies and popcorn. If the price of movie tickets increased to $10,000 a flick, then the demand for popcorn will decline since not as many people will be attending movies. Also, if the price of the movie ticket goes down to 50 cents per ticket, due to the income effect the demand for popcorn will go up.


Test Yourself:

Cameras and camera film are complementary goods. What would happen to the demand for cameras if the price of film went up to one million dollars?


You can't have s'mores without Hershey's Chocolate and Marshmellows



Hershey's chocolate bars and Kraft marshmallows are an example of complementary goods. Hershey's would have you believe that their chocolate is required for making a perfect s'more, similarly so would the Kraft company that makes the famous Jet-Puffed marshmallows. They are both used and demanded together because people use them to make s'mores. Everyone knows that if your going to make a s'more, you're going to need a marshmallow and part of a Hershey's chocolate bar to make a real s'more. When wanting s'mores, you wouldn't buy the Hershey's chocolat without also buying some marshmallows.


Peanut Butter Jelly Time!



external image peanut-butter-jelly-spreader-2.jpg
Another two goods that are complementary are peanut butter and jelly. Look at the cross elasticity to see that peanut butter are elastic. If the percentage of the price of jelly rose 50 % the demand for peanut butter would lower to -10 %. To find the answer you don't even need to use specific numbers, all you have to know is whether the values or postivie or negative

Exy= Percentage change in quantity demanded of good / Percentage change in the price of good y

= -10% / 50%

= Neg / Pos

= Neg cross elasticity, which proves by
definition that they are complementary goods


Answer:


If the price of the camera film goes up, by definition the demand for cameras will go down. Basically because the two goods are so close to eachother, pretty much a pair or a set, if they don't want one of the goods, they won't want to buy the other one either. If film is essential to using cameras, and film costs one million dollars, people won't want to pay for the film and thus not have any reason to buy a camera. One of two complementary goods isn't worth as much as when it's with the other. People only buy cameras if they can by the film. (Warning, this question is sooo ten years ago).


Links:

For more on the definition of complementary goods, visit http://www.auburn.edu/~johnspm/gloss/complementary_goods
For more on complementary goods and cross price elasticity of demand, go to http://moneyterms.co.uk/complementary-goods/
For more on how to make s'mores, visti http://www.wikihow.com/Make-a-Smore
For information on how to enter a Hershey's contest to win a six night trip for two to the British Virgin Islands, go to http://www.hersheys.com/cadbury/virginislands/