Friday, October 3, 2014

How are Complementary Goods like Unicorns?

Sometimes is it hard to come up with good examples of Complements when studying the basics of supply and demand.  They can be elusive, like unicorns.

Complementary Goods are generally taught as a demand-side function.  It describes the relationship between two goods that are separate and distinct but often (or always) used together. There is an INVERSE relationship between the change the price of one good and the demand for the other.

Here is an example (source HERE)

Low meat supply, low spice demand

You may remember hearing about a shortage of certain meat products at fast-food restaurants in China over the summer, due to the news that a major supplier was handling meat improperly and selling expired meat to restaurants. 
The impact reached across oceans, certainly to the fast-food chains like McDonald’s, which changed suppliers and couldn’t keep up with the demand because of the news. 
But less meat to eat also means less meat to season, so McCormick & Co. Inc. also lost out. The Baltimore-based spice maker acknowledged the effects in its quarterly report Thursday. 
“Our quick service restaurant customers in the Asia-Pacific region are currently being impacted by well-publicized supply issues,” said President and CEO Alan Wilson. “This is affecting our sales results in the region and has us cautious in our near term outlook.” 
That region showed a 1 percent decrease in industrial sales as a result.
With a decrease in supply of beef the price of beef increases.  When the price deceases the quantity demanded for beef decreases (movement ALONG the Demand Curve).

With less beef being produced and consumed there is less need for complementary goods, like spices. The Demand for spices will decrease as a result.

Notice the inverse relationship:  Price of Beef Increases, the Demand for Spices  Decreases.  

That is characteristic of Complementary goods (and services).
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