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Changes in Price
Changes in price tells us whether the two products are complements or substitutes.
Complements
- In the diagram above, as the budget line rotates to the right it means the price of good X must havedecreased
- The consumer buysmoreunits of good X andmoreunits of good Y.
- This means the two products are complements.
Substitutes
In the diagram above, as the budget line rotates to the right it means the price of good X must have decreased.
The consumer buys
more
units of good X and less
units of good Y.This means the two products are substitutes.
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Example: Changes in Price
Based on the diagram above, candy and milkshakes are:
A) complements
B) substitutes
C) unrelated
D) normal goods
B
As the price of candy decreases, we buy more candy and less milkshakes which means that they are substitutes.