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Question
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.
Solution
Shoes and socks both are complementary to each other and are used together. Therefore, the increase in shoe price will discourage the demand for socks. Therefore, due to the decrease in demand for socks, the demand curve for socks will shift leftwards parallelly from D1D1 to D2D2. The supply remaining unchanged, at the equilibrium price Pe, there exists excess supply of socks, which reduces the price of socks and the new equilibrium will be at E2, with equilibrium price P2 and equilibrium quantity q2.
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