Perfect Complements and Substitutes

Perfect Complements and Substitutes

Perfect Substitutes

• Two products are perfect substitutes when you are always willing to give up the same number of Ys for one more X. The MRS (Marginal Rate of Substitution) is

  constant

  ---

• In the diagram below, let's say that you are always willing to give up 2 glasses of apple juice for every 1 extra glass of orange juice.
• This means your MRS would be

  -2

  ---

Perfect Complements

• Two products are perfect complements when you always want to consume X and Y together in the same proportion (ratio). The MRS is

  0

  ---

  or

  infinity

  ---

  Example: Right shoe and left shoe. You need exactly one right shoe with every left shoe.
• The indifference curves for perfect complements will always be right angles.
• In the diagram below, if you have one right shoe, you only need one left shoe. So if you have one right shoe and 5 left shoes you are still on the same indifference curve because those extra left shoes will just go to waste.
• The best point to be at is on the corner of each indifference curve (least amount of waste).
• The ratio for perfect complements does not always have to be 1 to 1. Example: You could have 2 ice cubes in every glass of orange juice.

Example: Perfect Complements and Substitutes