As is the case with most economic choices in microeconomics, consumer demand is often driven by price. Consumer sensitivity to price isn’t fixed though! Their sensitivity to price varies from one product to another. The change in consumer demand for a product in response to price changes is called price elasticity. It can be quantified using Price Elasticity of Demand (PED).

Sometimes the exact good a consumer wants isn’t available. If a recipe calls for cashews but the grocery store doesn’t have any, a consumer may buy peanuts instead. In this case, the peanuts are considered a substitute good.

For a good (e.g. peanuts) to be a substitute for another good (e.g. cashews), demand for the good must increase in response to price increases for the other good (e.g. cashews).

When the value of one product (e.g. ice cream) is increased by another good (e.g. ice cream cones), they are considered complementary goods.

Complementary goods are also defined by their relationship around price. When the price of ice cream increases, demand for ice cream decreases. In response, the consumer demand for ice cream cones decreases.

Cross-Price Elasticity of Demand (CPED) is a technique for quantifying how changes to the price of one good impact the demand of another; it can also help with identifying whether the goods are substitute or complementary.

When a price increase for one good (such as yoga mats) has no impact on the price of another good (ice cream cones), they are considered independent goods.