How do substitutes and complements effect supply and demand?

Answer 1

We'll tackle this problem one by one. let's start with substitutes.

Substitute goods are goods that are able to be interchangeable i.e. if you don't have A, you can still use B

Teas and coffees

Imagine, that at the starting place, both of these goods are sold at price P.

However, due to a good harvest year, coffee price was able to decrease (since coffee bean prices decreased), to P1 lower than P.

This, in effect means that people will switch from Teas to coffee (due to cheaper price), and thus, increasing the quantity supplied and demanded of coffee while decreasing the quantity supplied and demanded of tea

Onto complements.

Compliments goods are goods that are normally used together for example, Computers and Windows.

Imagine then, what would happen if the demand of Windows increase? To run windows, people need a computer. Therefore, if the demand of Windows increase, the demand of Computers would in return, also increase. And if people demand less Windows, they would also demand less computers (although you can argue they switch to Mac or Linux!) Much the same with supply, if they supply less computers, the supply level of Windows must also go down to not have excess software in the market. If they produce less windows, less computers need to be produced for the same reason!