A rise in the price of a good may not lead to a fall in the demand for the complements.

Introduction

The demand for a good is the quantity of the good that consumers are able and willing to buy at each price over a period of time, ceteris paribus. The supply of a good is the quantity of the good that firms are able and willing to sell at each price over a period of time, ceteris paribus. In the free market, the price of a good is determined by the market forces of demand and supply.

Many students think that a rise in the price of a good will lead to a fall in the demand for the complements. Mr. Edmund Quek will provide a more detailed explanation on this economic misconception in economics tuition.

Exposition

The price of a good may rise due to a decrease in the supply. A decrease in the supply of a good will lead to a rise in the price resulting in a decrease in the quantity demanded. When this happens, the demand for the complements will fall. The supply of a good may fall due to several reasons. For example, a rise in the cost of production of a good will lead to a decrease in the supply. When the cost of production of a good rises, firms will increase the price at each quantity to maintain profitability. In other words, they will reduce the quantity supplied at each price which will lead to a decrease in the supply. If the production capacity in the industry decreases, which may occur due to a decrease in the number of firms in the industry or a contraction of the production capacities of the existing firms, the supply of the good will fall. However, apart from a decrease in the supply of a good, the price may also rise due to an increase in the demand. An increase in the demand for a good will lead to an increase in the price and the quantity. When this happens, the demand for the complements will rise. The demand for a good may rise due to several reasons. For example, a change in tastes and preferences towards a good will lead to an increase in the demand. A rise in the prices of substitutes for a good will induce consumers to buy less of the substitutes resulting in an increase in the demand for the good. Therefore, whether a rise in the price of a good will lead to a fall in the demand for the complements will depend on the reason for the rise in the price of the good.

Economics Tuition Singapore @ Economics Cafe
Principal Economics Tutor: Mr. Edmund Quek