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The Consumer’s Income

As with income, the effect that this has on the amount that one is willing and able to buy depends on the type of good we’re talking about. Think about two goods that are typically consumed together. For example, bagels and cream cheese. We call these types of goods compliments. If the price of a bagel goes up, the Law of Demand tells us that we will be willing/able to buy fewer bagels. But if we want fewer bagels, we will also want to use less cream cheese (since we typically use them together). Therefore, an increase in the price of bagels means we want to purchase less cream cheese. We can summarize this by saying that when two goods are complements, there is an inverse relationship between the price of one good and the demand for the other good. 

On the other hand, some goods are considered to be substitutes for one another: you don’t consume both of them together, but instead choose to consume one or the other. For example, for some people Coke and Pepsi are substitutes (as with inferior goods, what is a substitute good for one person may not be a substitute for another person). If the price of Coke increases, this may make Pepsi relatively more attractive. The Law of Demand tells us that fewer people will buy Coke; some of these people may decide to switch to Pepsi instead, therefore increasing the amount of Pepsi that people are willing and able to buy. We summarize this by saying that when two goods are substitutes, there is a positive relationship between the price of one good and the demand for the other good.