Background
Complementarity in economics refers to a situation where the demand for two goods or services is interconnected. If an increase in the price of one good leads to a decrease in the demand for another, these goods are considered complements. This relationship typically emerges because the goods are used or purchased together, such as car tires and petrol or printers and ink cartridges.
Historical Context
The concept of complementarity has long been considered in economic analyses of consumer behavior. Early economic thinkers and researchers identified these relationships through the observation of market trends and consumption patterns, offering insights into how consumers allocate their resources across related goods.
Definitions and Concepts
Complementary goods are products that are commonly used together. The central premise is that the usage and consumption of one good enhance the utility of the other. For example, for a consumer who owns a coffee machine, coffee pods could be considered a complementary good.
Major Analytical Frameworks
Analyses of complementarity can be framed within various schools of economic thought:
Classical Economics
Focuses on the initial recognition of interactive buying patterns in derived demand for essential goods and services.
Neoclassical Economics
Refines complementarity using the law of demand and marginal utility theory, analyzing substitutive effects quantitatively when relative prices change.
Keynesian Economics
Looks at the role of complementary goods within aggregate demand, emphasizing how changes in one sector influence broader economic activity.
Marxian Economics
Associates complementary goods with the modes of production and considers how monopolistic and oligopolistic structures exploit such dependencies.
Institutional Economics
Examines the regulatory and behavioral aspects influencing how complementary relationships develop and shape consumer markets.
Behavioral Economics
Studies consumer behavior, recognizing psychological and social factors influencing why goods become complements.
Post-Keynesian Economics
Analyzes how income distribution and varying demand propensities affect the consumption of complementary goods.
Austrian Economics
Discusses the subjective value of complementary goods within the functional unit of heterogeneous capital structures.
Development Economics
Examines how infrastructure goods act as complements in economic development strategies for emerging economies.
Monetarism
Investigates the relationship between monetary policy and demand shifts in complementary goods.
Comparative Analysis
The analysis often juxtaposes complementary goods against substitute goods, where an increase in the price of one decreases the demand for the other, but increases demand for its substitute.
Case Studies
The Automobile Industry
-Guides through data showing how prices of vehicles and their essential components interrelate.
Technology Markets
-Examines device-ecosystem relationships (smartphones and apps).
Suggested Books for Further Studies
- “Microeconomic Theory” by Andreu Mas-Colell, Michael D. Whinston, and Jerry R. Green
- “The General Theory of Employment, Interest, and Money” by John Maynard Keynes
- “Outline of a Theory of Practice” by Pierre Bourdieu
Related Terms with Definitions
Substitute: A good that can replace another to fulfill similar desires or needs; as the price of one rises, the demand for its substitute increases.
Marginal Utility: The additional satisfaction or utility that a consumer derives from consuming an additional unit of a good or service.
Derived Demand: The demand for a product that occurs due to the demand for another related good or service.
