Using supply and demand curves, show how an increase in the price of shoes affects the price of a pair of socks and the number of pairs of socks bought and sold.
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Solution
Shoes and socks are complementary goods. Accordingly, demand for socks is expected to fall with rise in the price of shoes. Thus, demand curve (for socks) shifts backward. Less will be purchased at the same price. When demand curve shifts backward, the equilibrium price and quantity will be affected as shown in Fig. In Fig, D is the initial demand curve and S is the initial supply curve related to socks. E is the initial equilibrium where supply and demand curves intersect each other. OP is the equilibrium price and OQ is the equilibrium quantity of socks. When the price of shoes increases, demand curve for socks shifts backward as indicated by D1. Equilibrium price (of a pair of socks) falls from OP to OP1 and equilibrium quantity (number of pairs of socks bought and sold) falls from OQ to OQ1.