We expect that the price of other forms of energy would impact the price of natural gas. For example, if electricity, oil or coal becomes less expensive we would expect some buyers to switch to these other products. Alternatively, if gas-burning furnaces experience a technological breakthrough that makes them more efficient and cheaper we would expect some users of other fuels to move to gas. Among these examples, it is clear that oil and electricity are substitute fuels for gas; in contrast the efficient new gas furnace complements the use of gas. We use these terms, substitutes and complements, to describe products that influence the demand for the primary good.
Substitute goods: when a price reduction (rise)
for a related product reduces (increases) the demand for a primary product, it is a substitute for the primary product.
Complementary goods: when a price reduction (rise)
for a related product increases (reduces) the demand for a primary product, it is a complement for the primary product.
Clearly electricity is a substitute for gas whereas the gas furnace is a complement for gas as a fuel. The words substitutes and complements immediately suggest the nature of the relationships. Every product has complements and substitutes. As another example: electronic readers are substitutes for paper-form books; a rise in the price of paper books should increase the demand for electronic readers at any price for electronic readers. In graphical terms, the demand curve shifts in response to changes in the prices of other goods – an increase in the price of paper-form books will shift the demand for electronic readers outward, because more electronic readers will be demanded at any price.
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