31.1.14

THEORY IN PRACTICE: A COMPLEMENTARY GOOD


SPOTTED - I’ve always been interested in economic theory, and how it applies to the real world. Sometimes it’s a stretch, sometime it’s a leap of imagination and sometimes it's the easiest thing to spot. I spotted [image above] what might be the most brilliant example of the theory of a ‘Complimentary Good’ at a Walgreens. Wikipedia defines the theory as:

“In economics, a complementary good is a good with a negative cross elasticity of demand, in contrast to a substitute good. This means a good's demand is increased when the price of another good is decreased. Conversely, the demand for a good is decreased when the price of another good is increased. If goods A and B are complements, an increase in the price of A will result in a leftward movement along the demand curve of A and cause the demand curve for B to shift in; less of each good will be demanded. A decrease in price of A will result in a rightward movement along the demand curve of A and cause the demand curve B to shift outward; more of each good will be demanded.”

That all sounds like a lot of mumbo jumbo to me, all they’re saying is:

When you buy a computer, you will also need to buy software. Computer hardware and software are therefore complementary goods: two products, for which an increase [or fall] in demand for one leads to an increase [fall] in demand for the other.

It’s great to see that the management at Walgreens has recognized there is a positive correlation between alcohol consumption and the demand for contraceptive goods.

Prof. Khanna

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