Question

If consumers often purchase muffins to eat while they drink their lattés at local coffee shops, what would happen to the equilibrium price and quantity of lattés if the price of muffins falls?

Answer 1

Answer:

Both quantity demanded and price will increase for lattes

Explanation:

When two goods or services are purchased and consumed together, it is known as complementary goods. For example, socks and shoes, or a phone and headphones. Complementary goods tend to have an inverse relationship. i.e. when the price of one good falls, the demand for the other increases. This can be explained further using the example provided in the question...

When the price of muffin falls, it makes them cheaper, causing a downward movement in the demand curve. When this happens, the quantity of muffins purchased will increase. Therefore, more lattes would be required to consume with the muffins. This will lead to a shift in the demand curve from left to right from D1 to D2 (refer diagram). The quantity demanded will increase from QD1 to QD2 and price will increase from P1 to P2.

It is important to note one thing. A change in price of a product will always cause a movement along the demand curve. A change in any factor other than price will cause a shift in the demand curve :)