Definition: complements in production are goods that are produced together using the same or linked resources. A price change in one input or output can affect the quantity supplied of the other, even if the latter’s price hasn’t changed.
Important distinction: complements in production are not about how consumers use goods together (complements in consumption, e.g., milk and cereal); they are about how producers’ outputs are linked in the production process.
Key idea: a price change in a related output in the production process can change the supply of another output.
Examples of complements in production
Asphalt and oil
Asphalt is a byproduct of refining oil.
If oil prices rise and production of oil increases, more asphalt is produced by default.
Result: even if asphalt’s price stays the same, its supply on the market can rise because it is a byproduct of oil production.
Leather and beef
Leather comes from cow hides produced as a byproduct of beef production.
Ramp up beef production → more hides → more leather available on the market.
Donuts and donut holes (example used for a lighter context)
Donuts are produced by a process that also yields donut holes; increased production of donuts implies more holes.
If we assume donut production yields holes proportionally, more donut output → more donut holes available.
Plastics and petroleum (refinery byproducts)
Petroleum refining yields multiple byproducts, including plastic.
When petroleum production expands (due to high prices for petroleum), plastics byproduct supply can increase as well.
Whey and cheese; butter and buttermilk
Cheese production yields whey as a byproduct; butter production leaves behind milk portions that become buttermilk.
If cheese price rises, producers may expand cheese production, which increases whey supply even if whey’s price hasn’t changed.
If butter production increases, remaining milk fractions yield more buttermilk.
“Made together” intuition from real-world byproducts
The main point: complements in production arise from the production process itself, not from consumer demand relationships.
Related discussion point: some real-world examples people suggest include paper towels and petroleum or other byproduct pairings; the exact pair can depend on industry specifics (e.g., paper production linked to pulp and packaging materials).
Substitutes in production
Definition: substitutes in production occur when resources can be used for two or more outputs that compete for the same inputs. A price change in one output can cause a reallocation of resources toward that output, reducing the supply of the other output.
Resource allocation perspective: consider the time, land, or other inputs that could be used for either product. If one product becomes more valuable, producers shift resources to that product.
Example: markers (red vs. purple) produced on similar production lines
Production lines for red and purple markers are highly similar; only the final step (color dye) differs.
Time is a fixed resource (e.g., 24 hours). If the price of purple markers rises, producers allocate more time to purple production.
Consequence: purple supply increases, red supply decreases due to the fixed resource constraint.
Substitution example in agriculture: corn vs. wheat on a farmer’s land
A farmer has a fixed amount of land and must decide how to allocate it between corn and wheat.
If the price of corn rises, the farmer will allocate more land to corn and less to wheat, changing the producers’ decisions and the relative supplies of corn and wheat.
In-class worksheet: substitutes in production (farmer with fixed land)
Setup: farmer has a fixed amount of land and must decide between corn and wheat.
Task: three steps on the worksheet
1) Determine whether the change will affect the quantity supplied or the supply for corn and for wheat when the price of corn rises.
2) State whether it will be an increase or a decrease for each (corn and wheat).
3) Draw the related supply/demand adjustments and fill in blanks on the worksheet.
Process guidance given in class:
Draw the initial points and then show movement along the curve (quantity change) versus a shift of the entire supply curve (supply change).
At the bottom, there are two iClicker-style multiple-choice questions to answer later.
Work for about 30 seconds solo, then discuss with a neighbor.
Instructor tips during the exercise:
When corn price rises, you typically see an increase in corn quantity supplied (movement along the corn supply curve) and a shift in the wheat supply curve to reflect reduced wheat supply (since inputs are diverted to corn).
Pay close attention to the question’s wording: some items ask about a movement along the same supply curve (quantity supplied) while others ask about a shift of the entire supply curve (supply).
In the exam, you may not have two questions back-to-back; read carefully to determine which market (corn or wheat) and which aspect (movement vs shift) the question is asking about.
Other important shifters of supply (non-price factors)
Expectations for future prices
If producers expect higher prices in the future, they may withhold current supply to sell more later, reducing today’s supply.
Conversely, if they expect lower prices in the future, they may increase today’s supply to avoid losses.
Storability matters (storage life): non-storable goods (bread, fresh fruit) have less room to adjust supply because they spoil soon; storables (canned goods) allow larger adjustments.
Number of sellers
More sellers entering the market increases supply (shifts right).
Sellers exiting the market decreases supply (shifts left).
Real-world example: February 2022, a U.S. baby formula shortage occurred when Abbott’s Sturgis, Michigan plant had a bacteria outbreak and was shut down, reducing the number of formula producers and causing a dramatic contraction in supply for about six months.
Other factors mentioned:
A shift in supply may be due to technology, input costs, or other production constraints (the lecture mentions “prominent shifters” with sunscreen as an example).
Review of terminology and concepts
Movement vs. shift
Price change -> movement along the same supply curve (quantity supplied changes; supply curve itself does not shift).
Other factors (input costs, technology, expectations, number of sellers) -> shift of the supply curve (supply itself changes).
Quantity supplied vs. supply
Quantity supplied: a point on the current supply curve; changes when price changes (movement along the curve).
Supply: the entire curve itself; changes when non-price factors change.
Perspective matters (seller vs. buyer)
Some questions ask for the seller’s perspective (production/inputs); others ask for the buyer’s perspective (demand/consumption).
Use context clues (e.g., terms like firm, production, or inputs signal seller; terms like consumer, purchases signal buyer).
Quick example recap: smartphone market
If the price of smartphones rises:
Quantity supplied increases (movement along the supply curve).
The supply curve itself does not shift due to price alone.
If any non-price factor changes (e.g., a new technology reduces production cost, or a new supplier enters), the supply curve could shift.
Chapter 4: Market analysis and types of economies
Two broad types of economies
Planned (centralized) economies: a single authority tries to determine what to produce, how much, who gets it, and at what prices. Examples discussed include North Korea.
Market economies: rely on the forces of supply and demand to determine what gets produced and at what prices; the government may intervene to improve outcomes in cases of market failures or equity concerns.
Real-world takeaway on economies
North Korea (central planning) vs. South Korea (market-oriented reforms) shows stark differences in prosperity, illustrating why most countries adopt market-based mechanisms with selective government intervention.
Markets in general
Markets are places (physical or digital) where buyers and sellers meet to exchange goods/services (e.g., coffee market, Etsy, Airbnb).
Markets also exist for rental arrangements (short-term, like game weekends) and even dating/marriage markets in some cultural contexts.
The marriage market anecdote
The instructor recounts accidentally encountering a marriage market in China, highlighting how some markets exist beyond traditional goods and services.
Real-world relevance and ethical notes
Market outcomes are not perfect; policy may intervene to address affordability and equity concerns (e.g., food access).
The examples emphasize how production decisions depend on prices, expectations, and resource constraints, which has real-world implications for industries, employment, and consumer welfare.
Byproducts and joint production underscore how changes in one part of an industry ripple through related outputs, informing regulation and policy considerations for waste, byproducts, and environmental impacts.
Key terms to review (quick reference)
Complements in production: goods produced together; a price change in one can affect the supply of the other due to joint production.
Substitutes in production: goods that compete for the same resources; a price change in one can reallocate resources toward that good, reducing the supply of the other.
Movement along a supply curve: change in quantity supplied due to a price change.
Shift of the supply curve: change in supply due to non-price factors (expectations, number of sellers, technology, input costs).
Quantity supplied vs. supply: movement along vs. the entire curve.
Market economy: economies guided by supply/demand with occasional government intervention.
Planned economy: centrally controlled production and allocation by the government.
Byproducts: secondary outputs produced alongside the main product in an industrial process (e.g., asphalt from oil refining, whey from cheese).
Storability: the ability to store a product for future sale without spoilage, influencing how quickly producers adjust supply in response to price expectations.
Endnotes from the session
The instructor used a mix of heavy examples (grim byproducts, light donut-hole humor) to illustrate production linkages and to keep students engaged.
There was emphasis on careful reading of questions to determine whether the prompt asks about a movement along a curve (quantity supplied) or a shift (supply), and whether the scenario refers to a seller’s or a buyer’s perspective.
The in-class activity included real-time discussion, neighbor dialogue, and illuminated how theoretical concepts apply to practical, test-style questions.