The last demand shifter on the list (What Shifts Demand) is the price of a related good. It is the one that most often trips people up, because one price change touches two markets.
Key idea
Two goods are substitutes if a higher price for one raises demand for the other (coffee and tea). They are complements if a higher price for one lowers demand for the other (coffee and coffee filters). The good whose price changed has a movement along its own demand curve; the related good's demand curve shifts.
Why it works
Substitutes do the same job, so when coffee gets pricier some buyers switch to tea: tea is wanted more at every tea price. Complements are used together, so pricier coffee makes the coffee-and-filter pair more expensive; people drink less coffee and need fewer filters at every filter price. In both cases, the coffee market itself only sees a change in its own price: a movement along coffee's demand curve.
Worked example: One price change, two markets
The price of coffee rises sharply. What happens to (a) the quantity of coffee demanded, (b) the demand for tea, (c) the demand for coffee filters?
- (a) Coffee's own price rose: quantity demanded of coffee falls, a movement along coffee's demand curve.
- (b) Tea is a substitute: demand for tea increases (shifts right).
- (c) Filters are a complement: demand for filters decreases (shifts left).
Answer: (a) falls (movement), (b) increases (shift right), (c) decreases (shift left).
Worked example: Name the relationship
When the price of gaming consoles fell, sales of video games rose. Are consoles and games substitutes or complements?
- A lower console price raised demand for games.
- The price of one and the demand for the other moved in opposite directions: complements.
Answer: Complements.
Common mistake
Shifting the demand curve of the good whose own price changed: "coffee got more expensive, so coffee demand shifts left." The coffee market moves along its curve; it's the other good's curve that shifts. Check: write down which market you are drawing. A price on that graph's own axis moves you along; a price from another market shifts the curve.