If products c and d are close substitutes, an increase in the price of c will

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  So let me get this straight: substitutes are similar products that can be substituted for yours, and complements are products that work together somehow?

  • Yes, exactly.

    Substitutes: Coke and Pepsi, or Chrome and Firefox.
    Complements: Bacon and eggs, or left shoes and right shoes.

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    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.

• 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?

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    So the price of Coke increases...now more consumers will be more interested in buying Pepsi at all possible prices. If you picture a demand schedule for Pepsi, with P and Q, then Q increases at every corresponding P, resulting in a whole new demand curve for Pepsi.

• 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?

  • The short answer is yes. What you are describing is something that actuaries do. Actuaries are mathematicians that calculate the probability of events so as to guide companies who have financial stakes in events tied to probability. They are indispensable to the insurance industry and are quite well paid. To learn more about Actuaries try these websites:

    http://en.wikipedia.org/wiki/Actuary
    http://www.bls.gov/ooh/Math/Actuaries.htm

• 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?

  • That is why there are a lot of assumptions should be done when you are giving an example. It is more common that people assume use oranges is a substitute for apples.

• what does moving along demand curve depicts?

  • 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.)

• 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.

• What other examples are similar to this one as related products?

  • The example of a car is one that comes to mind. If the price of gasoline increased, it would cause more people to ride (for example) public transportation. Therefore, the "Demand" as a whole would decrease for a car.

• 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.

• 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?

  • 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.

What happens when a substitutes price increases?

What happens when the prices of complements or substitutes for a product change?

What happens to demand if price of complement increases?

What happens to price when the price of a complement decreases?