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ABSTRACTION METHODS: Abstraction is the process of simplifying the complexities of the real world by ignoring (hopefully) unimportant details, especially (for our purposes) while doing economic analysis. Three common methods of actual, real world abstraction used in economic theories are words, graphs, and equations. Words can be misunderstood. Graphs are a little more precise. And equations tend to be the most precise of the three.
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                           OTHER PRICES, DEMAND DETERMINANT: The prices of other goods that influence the decision to purchase a particular good, which are assumed constant when a demand curve is constructed. Other prices can be for goods that are either substitutes-in-consumption or complements-in-consumption. This is one of five demand determinants that shift the demand curve when they change. The other four are other prices, buyers' preferences, buyers' expectations, and number of buyers. The demand for one good is based on the prices paid for other goods that might be purchased by buyers. A change in the price of a substitute good (or substitute-in-consumption) induces buyers to alter the mix of goods purchased, that is, substitute one good for another. An increase in the price of a substitute motivates buyers to buy more of this good and less of the substitute good. A change in the price of a complement good (or complement-in-consumption) induces buyers to demand more or less of both goods. An increase in the price of a complement motivates buyers to buy less of this good as they buy less of the complement good, too.Substitute and ComplementWhen it comes to the other prices demand determinant, goods fall into one of two types--substitute and complement.- Substitute-in-Consumption: A substitute-in-consumption is one of two (or more) goods that provides the same basic satisfaction or wants and needs. Substitute goods are consumed in an either/or fashion. Buyers buy one good or the other, but not both. Buying one good reduces or eliminates the need to buy the other. Examples include glazed donuts and fudge brownies.
- Complement-in-Consumption: A complement-in-consumption is one of two (or more) goods that provides satisfaction of wants and needs when used together. Complement goods are consumed jointly. One good provides greater satisfaction when consumed with the other good. Buying one good requires the purchase of the other. Examples include glazed donuts and ice cold milk.
Shifting the Demand Curve| Other Prices |  |
Changes in the prices of other goods cause the demand curve to shift. This can be illustrated using the negatively-sloped demand curve for Wacky Willy Stuffed Amigos presented in this exhibit. This demand curve captures the specific one-to-one, law of demand relation between demand price and quantity demanded. Other prices are assumed to remain constant with the construction of this demand curve.Now, consider how changes in other prices shift the demand curve. The demand curve is affected in a different way for a change in the price of a substitute good than for a complement good. - Substitute-in-Consumption: An increase in the price of a substitute good causes an increase in demand and a rightward shift of the demand curve. With the higher price, buyers buy less of the substitute good and more of this good. Click the [Other Price Up] button under the Substitute-in-Consumption heading to demonstrate.
A decrease in the price of a substitute good causes a decrease in demand and a leftward shift of the demand curve. With the lower price, buyers buy more of the substitute good and less of this good. Click the [Other Price Down] button under the Substitute-in-Consumption heading to demonstrate.
- Complement-in-Consumption: An increase in the price of a complement good causes a decrease in demand and a leftward shift of the demand curve. With the higher price, buyers buy less of the complement good and thus less of this good, too. Click the [Other Price Up] button under the Complement-in-Consumption heading to demonstrate.
A decrease in the price of a complement good causes an increase in demand and a rightward shift of the demand curve. With the lower price, buyers buy more of the complement good and thus more of this good, too. Click the [Other Price Down] button under the Complement-in-Consumption heading to demonstrate.
Not the Substitution EffectThe other prices demand determinant for a substitute good needs to be distinguished from a seemingly similar notion--the substitution effect.- Other Prices Demand Determinant: Other prices are a demand determinant that affects relative prices. In this case other prices change, while the price of this good remains unchanged. The change in other prices causes a change in demand and a shift of the demand curve. With the other prices demand determinant, the price of this good is fixed, while other prices change.
- Substitution Effect: The substitution effect results from a change in demand price, which affects the relative prices given that the prices of other goods remain unchanged. The change in relative prices then causes a change in quantity demanded and a movement along the demand curve. With the substitution effect, the price of this good changes, while other prices are fixed.
Cross Elasticity of DemandThe other prices demand determinant is commonly measured by the cross elasticity of demand. The cross elasticity of demand is the percentage change in the demand for one good due to, or divided by, the percentage change in the price of another good. A positive cross elasticity of demand indicates a substitute-in-consumption. A negative cross elasticity of demand indicates a complement-in-consumption.
Recommended Citation:OTHER PRICES, DEMAND DETERMINANT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: April 28, 2024].
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The portrait on the quarter is a more accurate likeness of George Washington than that on the dollar bill.
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"The roots of education are bitter, but the fruit is sweet." -- Aristotle
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NAG
Net Annual Gain
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