Question

Assume the perspective of a consumer who only drinks coffee with milk added. (That is, coffee and milk are complements.) Holding other things constant, if the market price of coffee decreases, then the equilibrium price for milk will eventually rise. Describe the sequence of shifts to supply and/or demand curves and the corresponding changes in equilibrium prices and quantities that justify your answer.

Answer 1

complement goods are goods that are consumed together. if the price of coffee falls, the quantity for demanded of coffee would rise. this is in line with the law of demand which says that the higher the price, the lower the quantity demanded and the lower the price the higher the quantity demanded. if the quantity demanded of coffee increases, the quantity demanded of milk would rise also. this would lead to an increase in equilibrium quantity of milk. the demand curve of milk will shift to the right while the supply curve would remain unchanged. this would lead to the demand outstripping the supply. when demand outstrips supply, equilibrium price would rise.

so an increase in the price of coffee would increase the equilibrium price and quantity of milk

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