Complementary Good or Substitute Good | Which of the following combinations of goods are complements and which are substitutes?

Which of the following combinations of goods are complements and which are substitutes?
Can they be either in different circumstances? Discuss.

a.  a mathematics class and an economics class

b.  tennis balls and a tennis racket

c.  steak and lobster

d.  a plane trip and a train trip to the same destination

e.  bacon and eggs

ANSWER  

a.  a mathematics class and an economics class

If the math class and the economics class do not conflict in scheduling, then the classes could be either complements or substitutes. Math is important for understanding economics, and economics can motivate mathematics, so the classes could be complements. If the classes conflict or the student has room for only one in his schedule, they are substitutes.

b.  tennis balls and a tennis racket

Tennis balls and a tennis racket are both needed to play tennis, thus they are complements.

c.  steak and lobster

Foods can both complement and substitute for each other. Steak and lobster can be substitutes, as when they are listed as separate items on a menu. However, they can also function as complements because they are often served together.

d.  a plane trip and a train trip to the same destination

Two modes of transportation between the same two points are substitutes for one another.

e.  bacon and eggs

Bacon and eggs are often eaten together and are complementary goods in that case. However, in relation to something else, such as pancakes, bacon and eggs can function as substitutes.

Demand | Price of Good Fall - Complementary Good

If the price of a good falls, what impact will this have on a complementary good?

Your Answer:

Complementary goods are those goods that mutually add to the enjoyment of each other, like hamburgers and French fries. 

If the price of a good falls, the law of demand tells us that a greater quantity of that good will be sold, and a greater quantity of a complementary good will also be sold.

Source: Heyne, Boettke, and Prychitko, The Economic Way of Thinking, 11/e, Pearson

http://wps.prenhall.com/bp_heyne_econway_11/33/8535/2184986.cw/-/2184999/index.html

Demand | What Else is Needed to Change the Demand?

Since a change only in the price of a good does not change the demand for that good, what else is needed to change the demand?

Your Answer:

For the demand of a good to change, consumers must be willing to pay higher prices for any quantities of a good than was previously the case, or they decide that they will only pay lower prices for any quantities of a good than was previously the case. 

Changes in attitudes toward the good or toward a compliment or substitute good must change to reflect a wholesale change in demand.

Source: Heyne, Boettke, and Prychitko, The Economic Way of Thinking, 11/e, Pearson

http://wps.prenhall.com/bp_heyne_econway_11/33/8535/2184986.cw/-/2184999/index.html

Supply & Demand | Complementary Good

Home mortgage loans and new homes are complementary goods. Interest rates fell beginning in the fall of 2001 and stayed at historically low levels for several years. Using the supply and demand model, discuss how falling interest rates affect the equilibrium price and quantity of the new home market.

Your Answer:

Falling interest rates cause the monthly payments for a new home to fall, all else remaining equal, which makes the purchase of a new home more affordable. 

As the interest rate and monthly mortgage payments fall, the demand for new homes increases, since mortgages and new homes are complementary products. The increase in demand for new homes is illustrated by a right shift in the demand curve. 

All else remaining equal, the equilibrium price and quantity of new homes will rise when interest rates fall.

Source: Pindyck / Rubinfeld, Microeconomics, 7th edition, Pearson

http://wps.prenhall.com/bp_pindyck_micro_7/100/25712/6582421.cw/index.html