Across the street from my rice store is Melissa, a lady who likes to sell pasta. When it comes to nutrition, pasta and rice are very similar: high carbs, low fat and similar levels of sodium and potassium. So for our customers, pasta and rice are close substitutes. Customers can have one without missing too much of the other. People say that Melissa is wonderful, kind and generous; but because she’s selling pasta, an alternative to MY rice, it’s safe to assume that she’s actually the anti-Christ.
Any change in the price of pasta will have an effect on the demand for my rice. If Melissa’s pasta price goes down, then you are more likely to substitute my rice for her pasta.
If (god willing) her costs increase and the price of her pasta goes up, then you are more likely to substitute her pasta for my rice.
The general rule is: If the price of a good’s substitute decreases, you will want less of the good and more of the substitute. If the price of a substitute increases, you will want more of the good and less of the substitute.
If rice had any emotions, I imagine it would mostly be sad. Nobody enjoys rice alone; they only enjoy it if there’s broccoli, chicken, beef or some other complementary food nearby. Rice would probably cry itself to sleep at night thinking about how it will never get anybody’s undivided attention. And you, a heartless jackass, probably wouldn’t even care.
Fortunately, rice doesn’t have emotions. The point remains: you don’t like having rice alone.
Your preference for rice will be partially (if not wholly) determined by your preference for complementary goods. If the price of broccoli went up, you will buy less broccoli.
But if the price went down, you will buy more broccoli:
The general rule is: when a price of one of two complementary goods increases, you will want less of both complementary goods. When a price decreases, you will want more of both.
P.S. Don’t worry if you haven’t digested the substitution and complement effect yet. I will give more examples in a bit.
A sad reality of my not-real rice shop is that when people begin to make more money, they suddenly stop coming to my shop. They rather go to Jenny’s. Jenny sells golden rice, which is a type of rice that allows consumers to get more vitamin A. People like golden rice more than my rice, but it’s more expensive. People generally wait until they get a raise or a new job to abandon me for Jenny (assholes).
My rice is an inferior good.
Jenny’s rice is a normal good.
The general rule is: as your income decreases, you will demand more inferior goods and fewer normal goods. As your income increases, you will demand fewer inferior goods and more normal goods.
The Substitution Effect. Remember: If the price of a good’s substitute decreases, you will want less of the good and more of the substitute. If the price of a substitute increases, you will want more of the good and less of the substitute.
Here are examples of the substitution effect:
The substitution effect happens when you give up one thing for another in response to a price change.
The complement effect. Remember: when a price of one of two complementary goods increases, you will buy less of both complementary goods. If a price decreases, you will buy more of both.
Here are examples of the complement effect:
The complement effect happens when you prefer to buy things together.
The Income Effect. Remember: As your income increases, you will want to buy more normal goods and less inferior goods.
Here are examples of the income effect:
-As parents become wealthier, they’re more likely to enroll their children in private schools rather than public schools.
-After a young person gets his first job, he’s more likely to buy a car instead of a bike.
-When a person has a bigger house, he’s more likely to buy physical books rather than digital books.
-When a worker makes a few more dollars per hour, he’s more likely to buy real cheese rather than imitation cheese.
Whichever direction your income goes, I hope it leads to you buying all of my books.
Anything that changes your preference for a product changes your willingness to buy that product. A common way to influence people’s preferences is to manipulate them.
For example: say Jenny kidnaps you, locks you up and starves you in her basement. On all four walls, you see advertisements for golden rice and pictures of Jenny poisoning all food supplies that aren’t golden rice. Jenny also leaves a recent news article on the floor that says that people who eat golden rice live, on average, 200 years more than people who don’t. If Jenny brainwashes you to the point where you can’t think of anything but eating golden rice, you will want to buy more of her rice.
And if the exact opposite happens: if my neighbor Melissa kidnaps you instead and tells you the golden rice in this neighborhood is sold by the actual anti-Christ, you will want to buy less of Jenny’s rice.
If you want to start a business, and kidnapping people isn’t your thing, you can still manipulate them into buying your product through biased statistics, unscientific studies and deceptive commercials. Or if you are a morally superior human being (as I am), you can manipulate people into buying your product by cultivating a reputation for integrity and goodwill (by starting an educational website for example). The point is, for the sake of business, people manipulate people into buying their products all the time; just in different ways.
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