This question was originally penned in our Economics Forum, but we closed that so it’s been reposed here.
Background: We are located in an economic model where product A has a “high product substitutability” with product B, which means (I think) that products A and B are substitutes.
In this same economic model, it has been determined that when products A and B are not present in the market, the sales of product C increase.
*Question 1: Does this mean that product C is a substitute for products A and B?
Now, it was further determined, within the same economic model, that in the presence of product C, the demand elasticity for product D increased.
*Question 2: Considering the previously stated relationship between products A, B and C, would it be fair to say that the demand elasticity of product D will also increase in the presence of either product A or B? In other words, can product C be replaced with product A or B in the previous statement and the result will be the same?
If you could state the source of your reply, even you yourself are the source, this would be greatly appreciated.
Here is a general answer:
A and B are substitutes, but they aren’t PERFECT substitutes (1 for 1). A and B are not PERFECT substitutes for C either, but they are substitutes.
if demand elasticity increases (closer to 1) then the product is more inelastic meaning price change to D doesn’t affect demand as much.
to Q2 I don’t think there is a relationship because AB are not C and D only moves if C moves. So without C and AB moves (price wise) D doesn’t have to move.
Gotta say, this can be a little misleading. Is every superior good a substitute for every inferior good? Are dvd players and ramen noodles substitutes?
I think when you model this sort of thing, thinking about why things shift is important. You can’t throw terms at a model and expect them to stick without thinking about the workings of the model.
To answer Q2, consider the square peg and round hole problem. Say you have a board with a round hole, a square hole, and a triangular hole. The corresponding pegs are products A, B, and C. The consumer doesn’t care which holes he pushes the pegs through, he just likes to push as many through as possible. If people buy C, they don’t need A and B. All three are substitutes. Product D could be chairs, and it wouldn’t really effect the elasticities of A, B, and C. If D was a saw/hammer set, it might.
I think that A,B are substitute goods and in that C is a substitute in the absence of AorB, and D is a complement good of C.
So D is therefore only affected by the change in C because they are complements. D is not a complement of AorB so does not change when AorB changes.