(a) Explain with examples the terms competitive demand and complementary demand. (b) With the aid of diagrams, analyse the effect of a decrease in the impor...

Answer Details

(a) Competitive (substitute) demand exists where two or more goods satisfy the same want, so that a rise in the demand for one reduces the demand for the other; the goods compete for the consumer's income. Examples: butter and margarine, tea and coffee, or different brands of soap.

Complementary (joint) demand exists where two goods are demanded together to satisfy a single want, so that a rise in the demand for one raises the demand for the other. Examples: cars and petrol, bread and butter, or pens and ink.

(b) Effect of a fall in the import duty on cars on the price and consumption of petrol. Cars and petrol are in complementary (joint) demand. A reduction in the import duty on cars lowers the cost of importing cars, so the supply of cars increases and the price of cars falls. At the lower price, more cars are bought and used.

Because petrol is used jointly with cars, the increased use of cars raises the demand for petrol at every price: the demand curve for petrol shifts to the right, from \(D\) to \(D_1\). Given the supply curve of petrol, this shift raises the equilibrium price of petrol and increases the quantity of petrol consumed. Thus a fall in the import duty on cars leads, through complementarity, to a higher price and higher consumption of petrol.

Two diagrams are used: (i) the car market, where the supply curve shifts right and the car price falls; (ii) the petrol market, where the demand curve shifts right (\(D\) to \(D_1\)) so that both price and quantity of petrol rise.