Complementary goods are items that are preferably used along with each other. One such good is more practical and popular among consumers if used in conjunction with another compliment. Thereby, any changes in the price of one good directly affect the demand and supply of another.
Complementary goods affect each other. That is to say, “an increase (decrease) in one product’s sales leads to an increase (decrease) in the other product’s demand” (Edalatpour & Mirzapour Al-e-Hashem, 2018, p. 305). A good example of complementary goods would be cars and gasoline. The more cars are sold, the more gasoline is demanded, and vice versa. Furthermore, as it is known, price, demand, and supply depend on each other.
For instance, as the number of drivers grows, so does the number of cars, increasing the gasoline demand straight away. Once the demand increases, manufacturers will raise the prices immediately. Moreover, the higher the demand for gasoline rises – the higher the prices are. That leads to a decrease in the need for automobiles because people would instead use public transport or taxi services if that is cheaper than having a personal vehicle.
Afterward, the decrease in the demand for cars leads to a reduction in their supply. Manufacturers may lose their profit trying to sell low-demanded goods. There are two solutions: either reduce the store or lower the price. Anyway, that leaves the gasoline producers with no other option than do the same. In other words, the downturn in the demand for cars inevitably makes gasoline cheaper.
The described above changes in complementary goods prices and demand and supply are recurrent unless other factors are involved. Otherwise, this chain of alterations would be sustained and ceaseless.
Reference
Edalatpour, M. A., & Mirzapour Al-e-Hashem, S. M. J. (2019). Simultaneous pricing and inventory decisions for substitute and complementary items with nonlinear holding cost. Production Engineering, 13, 305-315. Web.