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This paper analyses the following case study and answers the question given below –
Short Case: Complementary and substitute products, and effects on demand and quantity demanded.
Let’s assume that butter and honey are complementary goods. This would mean that an increase in the price of honey would result in a decrease in quantity demanded for butter. The logic would seem straightforward: as a result of a higher price for honey, less people will purchase honey and consequently there would be less demand for butter. This would hold true if the price increase in honey was caused by a supply shift (low supply of honey). However, this would not necessarily be the case if the increase in the price of honey was caused by an increase in demand for honey. If the higher price of honey was demand induced (like if a new medical discovery found that honey had great benefits against certain diseases) then the outcome would be a larger quantity of honey bought at the higher price and hence, a greater demand for butter.
The same is also relevant for substitute goods. If for example, ‘Mobil’ gasoline and ‘TOTAL’ gasoline are substitutes as fuel for cars, then one would expect to see an increase in the relative price of Mobil to result in an increase in demand for Total. This would be true if the increase in the price of Mobil was caused by a reduction in the supply of Mobil. If, on the other hand, the demand for Mobil increased because of a new improved formula that cleans fuel injectors and improves fuel efficiency. This would cause a price increase, and the demand for Mobil would actually increase and hence customers would be substituting away from the other product, TOTAL.
Question: Discuss the difference between demand and quantity demanded, and analyze substitutes and complements in light of the case as well as B200 material (reader 2). Also discuss the types of elasticity (price, income, cross elasticity) and the factors that affect demand. Provide examples within your discussion using products you are familiar with.