Related products are products whose demand is influenced by a price change of another related product.
Have you ever purchased a good or service and immediately needed other products? A couple buying their first home needs to furnish their home and may purchase furniture, and other accessories. Boating enthusiasts may need to purchase a new trailer when they buy a boat. These are examples of complements because the acquisition of one item results in an increase in the demand for the other item.
Theater tickets and babysitting services are complements. Suppose the Smiths love the theater. They have a child, so whenever they attend a play they must hire their babysitter, Jane. The graphs below illustrate the relationship between ticket prices and the demand for Jane's babysitting. When ticket prices were $40, the Smiths attended four plays. The theater has a promotion and drops the price of advanced purchases to $25. The Smiths choose to increase the numbers of tickets they buy to ten. In this case, the quantity demanded increased from four to ten because of a change in the price of tickets. Jane does not adjust her price, but the demand for her services increases because the Smiths need Jane to babysit six more times. (Jane could increase her price if she has other clients like the Smiths and sees a large increase in demand.) There is an outward shift in the demand for Jane's babysitting.
Substitutes are also related products because when the price of a good or service is changed it influences the demand for all of its substitutes. When the price of a good increases, the demand for all of its substitutes will also increase. Conversely, if the price of a good decreases, the demand for its substitutes will decrease. Competing companies in the same industry often sell substitute goods. For example, Coca-Cola and PepsiCo offer substitute soft drinks. If PepsiCo lowers its price, it can expect an increase in the quantity demanded for its soft drinks. Many consumers would now substitute Pepsi soft drinks for Coca-Cola soft drinks because they are substitutes. The demand for Coca-Cola would decrease. The graph below shows this by a shift of Coca-Cola's demand curve from A to B.
Demand – The Consumer's Perspective
Changes in Demand – When Consumer Tastes Change
Supply and Demand – Producers and Consumers Reach Agreement