Meaning of the term Complimentary goods and which one is correct for it :
a. It would decrease because of a shift in supply
b. It would decrease because of a shift in demand
c. It would increase because of a shift in supply
d. It would increase because of a shift in demand
e. It would not change because supply and demand effects would cancel each other out
Firstly, it is important to understand the exact meaning of the term Complimentary goods. Complimentary goods are a pair of two goods which complete each other. In other words, two goods which are generally used together as a single commodity to satisfy the want. They are mutually related to each other and hence a change is any factor of one commodity, has a direct impact on the other as well. For example, pen and ink are complimentary to each other. As an ink alone cannot function as an individual commodity and a pen alone cannot function as an individual commodity. They both compliment each other and can be only used together.
Let’s take different scenarios when the various factors change and what effect it has on the commodity:
Case 1: Price of pen Increases: If the price of the pen increases then, automatically the demand of the whole complimentary commodity deceases, as a customer cannot take just the ink as it will be of no use. Hence, if the price of pen increases, the demand for pen will decrease.
Case 2: Price of pen decreases: If the price of the pen decreases then, automatically the price of the whole complimentary commodity increases, a customer will prefer to buy more of that product due to low prices. Hence, if the price of pen decreases, the demand for pen will increase.
Case 3: Price of Ink Increases: If the price of the ink increases then, automatically the demand of the whole complimentary commodity deceases, as a customer cannot take just the pen as it will be of no use. Hence, if the price of ink increases, the demand for ink will decrease.
Case 4: Price of ink decreases: If the price of the ink decreases then, automatically the price of the whole complimentary commodity increases, a customer will prefer to buy more of that product due to low prices. Hence, if the price of ink decreases, the demand for ink will increase.
In the given example above, Banana and peanut butter are complimentary to each other. In the sense, as explained above Banana and peanut butter can satisfy the want together and not individually. Hence, a fall in the price of peanut better has dual advantages: the first is that it increases the demand for peanut better as an individual commodity and the second is that it directly increases the demand for banana also when both the commodities are used together to satisfy the want. Hence, the demand for both the peanut butter and banana increases as a result the supply for both the commodities also increases. In terms of the representation in the graph, the demand curve of that of banana shifts to the right , with the with it’s price remaining constant and the quantity increases as the demand increases.
Answer: Hence, Option D is the correct answer as it states that “It would increase because of a shift in demand”.