Question

Assuming steak and potatoes are complements, a decrease in the price of steak will a. decrease the demand for steak. b. increase the demand for steak. c. increase the demand for potatoes. d. decrease the demand for potatoes.

Short answer

A decrease in the price of steak will \(b.\) increase the demand for steak and \(c.\) increase the demand for potatoes, as they are complementary goods.

Step-by-step solution

Understand the concept of complementary goods

Complementary goods are those that are typically consumed together. If the price of one complementary good decreases, consumers tend to consume more of it, which in turn leads to an increase in the demand for the other complementary good, as they are consumed together. As a result, the price drop of a complementary good impacts the demand for both goods.

Analyze each option

a. Decrease the demand for steak: When the price of a good decreases, the demand for it generally increases because people want to consume more of it at the lower price. So, this option is incorrect. b. Increase the demand for steak: As explained in option A, when the price of a good decreases, its demand increases. Since the price of steak has decreased in this case, its demand will increase. So, this option is correct. c. Increase the demand for potatoes: Because steak and potatoes are complements, when the demand for steak increases, there will be an increase in the demand for potatoes as well. This option is also correct. d. Decrease the demand for potatoes: This option contradicts the concept of complementary goods discussed in Step 1, as an increased demand for steak (due to its price drop) should lead to an increase in the demand for potatoes as well. So, this option is incorrect.

Conclusion

The correct answers to this exercise are options b and c. A decrease in the price of steak will b. increase the demand for steak and c. increase the demand for potatoes, as they are complementary goods.

Key concepts

Price Elasticity of Demand

Understanding the price elasticity of demand is crucial when examining how the quantity demanded of a good responds to a change in its price. Elasticity measures the degree to which consumers change their demand for a product when its price changes.

Highly elastic products have consumers who are very responsive to price changes. If a good's price goes down, the quantity demanded will significantly increase, and vice versa. However, inelastic products see little change in demand with price fluctuations. Essential items, like medication, often have inelastic demand.

In the context of complementary goods, if the price of one product goes down and the goods are considered necessities, the quantity demanded for both the cheaper item and its complement will likely increase, even if the complement's price remains unchanged, because consumers will use the savings from one product to purchase more of the other.

Consumer Behavior

Consumer behavior studies how individuals make decisions to spend their available resources on various goods and services. This behavior is influenced by a multitude of factors, including personal preferences, socio-economic status, cultural trends, and the prices of goods.

With complementary goods, like steak and potatoes, a crucial aspect of consumer behavior is the preference for consumption bundles—combinations of goods that are used together. When the price of steak decreases, consumers might feel like they are getting a better deal, which encourages them to buy more steak and, consequently, more potatoes to maintain the balance of their preferred consumption bundle.

A thorough understanding of consumer behavior can guide businesses in pricing strategies, product placement, and marketing campaigns to effectively reach target audiences and influence their buying choices.

Demand Increase

A demand increase refers to a situation where a greater quantity of a product is sought after by consumers at the same price level. Demand can increase due to various factors, including a rise in consumer income, a change in tastes and preferences, or a decrease in the price of complementary goods.

When analyzing complementary goods, if the price of one decreases and consumers buy more of that good, there is concurrently an induced demand increase for its complement. This is because the utility or satisfaction derived from consuming both goods together is typically higher than consuming them separately.

For instance, if consumers begin purchasing more steak due to a price drop, it's only natural that the demand for potatoes will also rise as these two goods are often consumed together. This induced demand highlights the intertwined relationship between complementary goods within the marketplace.