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Price of related products and demand

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Changes in the prices of related products (either substitutes or complements) can affect the demand curve for a particular product.The example of an ebook illustrates how the demand curve can shift to the left or right depending on whether the prices of related products go up or down. Created by Sal Khan.

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  • leaf red style avatar for user Jack McClelland
    So let me get this straight: substitutes are similar products that can be substituted for yours, and complements are products that work together somehow?
    (37 votes)
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  • leaf green style avatar for user Aphiwe.Madeke
    what is ceteris paribus
    (6 votes)
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    • leaf green style avatar for user William Knight
      The term "ceteris paribus" is a Latin phrase meaning "everything else equal." Ceteris means "everything else." People use that term all the time without thinking about it when they're making a list and conclude it with et cetera (etc. -- and everything else"). Paribus, in Latin, means "equal." That's where we get the term "par."

      When economists construct a model, they take a real life situation and make it as simple as possible by ignoring certain variables that might actually affect the situation. There are too many variables to consider in most real life situations to make it completely understandable. We wouldn't be able to identify all the variables, and even if we could, we could not determine the precise degree by which they would affect the dependent variable. So we ignore them by assuming that they don't change -- ceteris paribus.

      For example, the law of demand says that when the price of something goes up, the quantity demanded will go down. But, it could be that that at the very moment the price of something went up, a consumer's income went up, plus he liked the item much more than he did the moment before, plus the price of a substitute went up at that very moment. The result could very well be that when the price of the item went up, the quantity demanded would actually go up. But when you consider the income effect and the substitution effect, that would make no sense. Thus, the law of demand actually states: When the price of an item goes up, the quantity demanded goes down, CETERIS PARIBUS. That is, the quantity demanded will go down if ALL THOSE OTHER THINGS REMAINED THE SAME.
      (33 votes)
  • blobby green style avatar for user sameer sheikh
    confused with how price of one changes demand in another and not quantity demanded.
    i thought, from the previous video, that increase/decrease in price correlated to an increase/decrease in the QUANTITY DEMANDED, not demand.

    so take the following example,

    an increase in the price of Coke causes an increase in the demand for Pepsi.

    Why is it demand for Pepsi and not quantity demanded? I mean we're talking about price right?
    (6 votes)
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  • piceratops tree style avatar for user Samir Abdalla Carvalhal
    Maybe I'm a little bit early to ask such a question and I will see the answer on classes to come, but how can I measure the "strength" that a piece of information (e.g.: "Hurricane 'X' will hit the coast.") on the Demand of items such as Water, Food, Flashlights, etc.
    - Is it possible to make an accurate estimate?
    - And for such an estimate to be made, what should i base myself on? Maybe, do research prices/quantity demanded that were practiced in the past when Hurricanes ocurred and do something like an arithmetic mean?
    (7 votes)
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  • aqualine sapling style avatar for user Ire Sarah Oluwa
    What about things like apples and oranges? How do you determine how many people, if the price of apples goes up, would treat oranges as a substitue and how many will treat it like a complement?
    (4 votes)
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  • leaf green style avatar for user HEMANT
    what does moving along demand curve depicts?
    (3 votes)
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    • female robot grace style avatar for user ChiefSohcahtoa
      Moving along the demand curve (changing from one point on the demand curve to another point on the demand curve) depicts a change only in quantity demanded. For a different price, there will be a different quantity demanded value associated with that price. Sal made it clear towards the end of the video that moving along the demand curve represents a change in quantity demanded (all outside factors remain constant "ceteris paribus," but a shift in or warping of the demand curve means that there was a change in demand and that some outside factor was changed (for example, the price of e-book readers increased.)
      (5 votes)
  • female robot grace style avatar for user Sarah
    Do price changes in complementary goods affect each other bidirectional or can there be examples of a unidirectional effect of a complementary good? I read an example about the change in demand in response to price increases of beer with pizza as a complementary good. A price increase in beer shifts demand of beer and pizza to the left. And vice versa a price increase in pizza shifts demand of beer and pizza to the left (bidirectional). Is it also possible that this effect only happens in one direction and are these still called complementary goods in this case? e.g. only when pizza price increases a shift in demand of pizza as well as beer occurs, but an increase of beer price doesn't affect pizza demand.

    Thanks for clarifying.
    (4 votes)
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  • leaf green style avatar for user Tarek Seif El Nasr
    What other examples are similar to this one as related products?
    (2 votes)
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  • male robot johnny style avatar for user capqueen
    This is the first time that I have been exposed to this kind of learning. Is there some kind of question and answer to test what is being learned. I f so where is it found. I'm excited about proving that I am comprehending all this newly learned information.
    (4 votes)
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  • aqualine tree style avatar for user Mohamed Loirraqi
    For the Kindle example, could you think of it as if the Kindle has it's own graph? So if Kindle prices increase, the quantity demanded for a Kindle decreases and that translates to an ENITRE demand for ebooks decreasing since Kindles complement ebooks so a change in quantity demanded for Kindles means a change in the number of people having Kindles which changes the entire demand curve for ebooks since all price ranges for the ebooks will be effected. Is that a valid way of explaining it?
    (3 votes)
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    • primosaur seedling style avatar for user Cameron
      Yes. Only one minor edit -- "which changes the entire demand curve for ebooks since all price ranges for the ebooks will be effected". The demand curve for ebooks shifts to the left because of the change in the price of the Kindle and not the price of the ebooks. The price change for ebooks is a result of the demand shift and not the cause of the demand shift.
      (2 votes)

Video transcript

We've talked a little bit about the law of demand which tells us all else equal, if we raise the price of a product, then the quantity demanded for that product will go down. Common sense. If we lower the price, than the quantity demanded will go up, and we'll see a few special cases for this. But what I want to do in this video is focus on these other things that we've been holding equal, the things that allow us to make this statement, that allow us to move along this curve, and think about if we were to change one of those things, that we were otherwise considering equal, how does that change the actual curve? How does that actually change the whole quantity demanded price relationship? And so the first of these that I will focus on, the first is the price of competing products. So if you assume that the price of-- actually I shouldn't say competing products, I'll say the price of related products, because we'll see that they're not competing. The price of related products is one of the things that we're assuming is constant when we, it's beheld equal when we show this relationship. We're assuming that these other things aren't changing. Now, what would happen if these things changed? Well, imagine we have, say, other ebooks-- books is price-- price goes up. The price of other ebooks go up. So what will that do to our price quantity demanded relationship? If other ebooks prices go up, now all of a sudden, my ebook, regardless of what price point we're at, at any of the price points, my ebook is going to look more desirable. At $2, it's more likely that people will want it, because the other stuff's more expensive. At $4 more people will want it, at $6 more people will want it, $8 more people will want it, at $10 more people will want it. So if this were to happen, that would actually shift the entire demand curve to the right. So it would start to look something like this. That is scenario one. And these other ebooks, we can call them substitutes for my product. So this right over here, these other ebooks, these are substitutes. People might say, oh, you know, that other book looks kind of comparable, if one is more expensive or one is cheaper, maybe I'll read one or the other. So in order to make this statement, in order to stay along this curve, we have to assume that this thing is constant. If this thing changes, this is going to move the curve. If other ebooks prices go up, it'll probably shift our curve to the right. If other ebooks prices go down, that will shift our entire curve to the left. So this is actually changing our demand. It's changing our whole relationship. So it's shifting demand to the right. So let me write that. So this is going to shift demand. So the entire relationship, demand, to the right. I really want to make sure that you have this point clear. When we hold everything else equal, we're moving along a given demand curve. We're essentially saying the demand, the price quantity demanded relationship, is held constant, and we can pick a price and we'll get a certain quantity demanded. We're moving along the curve. If we change one of those things, we might actually shift the curve. We'll actually change this demand schedule, which will change this curve. Now, there other related products, they don't just have to be substitutes. So, for example, let's think about scenario two. Or maybe the price of a Kindle goes up. Let me write this this way. Kindle's price goes up. Now, the Kindle is not a substitute. People don't either buy an ebook or they won't either buy my ebook or a Kindle. Kindle is a compliment. You actually need a Kindle or an iPad or something like it in order to consume my ebook. So this right over here is a complement. So if a complement's price becomes more expensive, and this is one of the things people might use to buy my book, then it would actually, for any given price, lower the quantity demanded. So in this situation, if my book is $2, since fewer people are going to have Kindles, or since maybe they used some of their money already to buy the Kindle, they're going to have less to buy my book or just fewer people will have the Kindle, for any given price is going to lower the quantity demanded. And so it'll essentially will shift, it'll change the entire demand curve will shift the demand curve to the left. So this right over here is scenario two. And you could imagine the other way, if the Kindle's price went down, then that would shift my demand curve to the right. If the price of substitutes went down, then that would shift my entire curve to the left. So you can think about all the scenarios, and actually I encourage you to. Think about drawing yourself, think about for products, that could be an ebook or could be some other type of product, and think about what would happen. Well, one, think about what the related products are, the substitutes and potentially complements, and then think about what happen as those prices change. And always keep in mind the difference between demand, which is this entire relationship, the entire curve that we can move along if we hold everything else equal and only change price, and quantity demanded, which is a particular quantity for our particular price holding everything else equal.