Two good are substitutes if a decrease in the price of one causes a decrease in demand for the other, causing the equilibrium price and quantity to fall. Email messages and overnight letters are examples of substitutes, meaning that, in many applications at least, the two serve similar functions.
Two goods are complements if a decrease in the price of one causes an increase in the demand for the other, causing the equilibrium price and quantity to rise. Tennis courts and tennis balls are examples of complements, because they are more valuable when used in combination than when used alone. Though tennis balls would still have some value by itself ? e.g. Batting practice, it would be of a lot more value if there were tennis courts on which to play. If the rental fees for tennis courts were to decrease, more and more people will play tennis and this will ultimately lead to an increase in demand for tennis balls (upward shift of the demand curve for tennis balls).
In 2006, the "Big Three" U.S. carmakers "Ford, General Motors and Chrysler have all reported a drop in car sales". However, "both Japanese carmakers Toyota and Honda posted a rise in annual". We can therefore define U.S. Cars and Japanese cars as substitute goods.
In a general perspective, the first downward shift (D0 ? D1) of the demand curve for U.S. Vehicles is caused by the increase in the price of their complement good ? petrol. The second downward shift (D1 ? D2) of the demand curve is because their substitutes ? Japanese cars, are becoming more competitive. This causes the equilibrium price and quantity to fall, which therefore means that Total Revenue (TR = P X Q) also falls and U.S. carmakers have a loss. This decline in demand in U.S. Vehicles can be explained. For decades, U ...