Question

Q: Use a graph to illustrate the effect of a change in the price of good A on +9 the equilibrium price and quantity for good B when A and B are substitutes. Use a graph to illustrate the effect of a change in the price of good A on the equilibrium price and quantity for good B when A and B are complements. Give an example of substitutes and complements in health care.

Answer 1

Answer: If A and B are perfect substitutes of each other, then if price of A increases , then consumers will switch from good A to good B, then demand for good B will increase and the demand curve for good B will shift rightward from D1 to D2 and as the economy moves from point A to point B, equilibrium price of good B will increase from P1 to P2 and the equilibrium quantity of good B will increase from Q1 to Q2( panel A).

Now if price of good A falls, then consumers will switch from consumption of good B to good A, and hence demand for Good B will fall and the demand curve for good B will shift leftward from D1 to D2 and as the economy moves from point A to point B, the equilibrium price of good B will decline from P1 to P2 and the equilibrium quantity of good B will decline from Q1 to Q2. ( panel B)

Now when good A and B are complements of each other, then when price of good A increases then consumer will demand less amount of good B and the demand for good B will decline and the demand curve of good B will shift leftward from D1 to D2 and as the economy moves from point A to point B, then the equilibrium price of good B will decline from P1 to P2 and the equilibrium quantity of good B will decline from Q1 to Q2. ( panel C)

Now when good A and B are complements of each other, then when price of good A falls, then consumer will demand higher amount of good B and hence the demand for good B will increase and the demand curve for good B will shift rightward from D1 to D2 and as the economy moves from point A to Point B, the equilibrium price of good B, will increase from P1 to P2 and the equilibrium quantity of good B will increase from Q1 to Q2. ( Panel D)

Online doctor consultation app and doctor consultation in a hospital are perfect substitutes of each because if the fees to a doctor in a hospital increases then consumers will get doctor consultation through different doctor consultation app. The opposite is also true.

Hearing aid and visit to an ENT specialist are complements of each other as the demand for hearing aids will decline if ENT specialist doctor doesn’t prescribe a hearing aid. Also if the price of hearing aid increases then consumers will not buy the hearing aid and hence demand to visit to an ENT specialist will decline as consumers will try some alternative remedies.