After you have worked through this section of the learning unit, you should be able to:
- distinguish between substitutes in production and complements in production.
- explain with the aid of supply curves the impact of change in the price of a substitute in production has on its related good.
- explain with the aid of supply curves the impact of a change in price of complement in production has on its related good.
Under the price of other goods we can distinguish between substitutes in production (alternative goods) and between complements in production (joint goods).
SUBSTITUTES IN PRODUCTION
Substitutes in production refer to the fact that it is possible to produce different goods with the same resources. When producers decide what to produce, they always consider the prices of alternative outputs that they can produce with the same resources.
Farmers producing maize will, for instance, take the price of soya beans into account when they decide how much land to allocate to the production of maize.
An increase in the price of soya beans relative to that of maize will reduce the supply of maize. Because it is more profitable for farmers to produce soya beans, they will shift more of their resources to producing soya beans.
Using many of the same resources, fried chicken producers can make and supply a range of products (e.g. chicken burgers or chicken wraps). They need to figure out which of these products they should supply in order to make the highest profit.
They also need to take into account that if the price of (an alternative product) a substitute in production such as chicken burgers increases, it might be profitable for them to switch to supplying chicken burgers instead of continuing with their present line of business, namely supplying fried chicken pieces. This switch will cause a decline in the supply of fried chicken. The supply curve for the current product will therefore shift to the left, thus showing that supply has decreased. This is illustrated in the following diagram:
Chicken burgers
Chicken burgers
Fried chicken pieces
Fried chicken pieces
Fried chicken pieces
An increase in the price of a substitute in production (chicken burgers) will lead to a decline in the supply of the other good (fried chicken pieces), and the supply curve for fried chicken pieces will shift to the left. At the same price and every other price, a lower quantity will be supplied than before the increase in the price of a substitute in production.
COMPLEMENTS IN PRODUCTION
Some products are produced jointly (e.g. sugar and molasses, wheat and bran, lead and zinc, beef and leather, cotton and cotton seed). Complements-in-production are two or more goods that are jointly produced using a given resource.
An increase in the supply of the major product (beef) results in an increase in the supply of the complement in production (leather), and the supply curve for the by-product shifts to the right. At every price, a greater quantity is supplied than before the increase in the supply of the major product.
Watch the following video clip to see the impact of a change in the price of a complement:
Activity
Choose the appropriate diagram that describes the following:
The change in the supply of a product if the price of its substitute in production increases:
Think again.
This shows the impact of an increase in price.
Correct.
If the price of its substitute in production increases then the supply of the good will decrease as producers shifts their production to the substitute good.
Think again.
If the price of its substitute in production increases then the supply of the good will decrease and not increase as producers shifts their production to the substitute good.
The change in the supply of a complement in production if the price of the related product decreases:
Think again.
This indicates an increase in the price of the product.
Think again.
This will happen if the price of the a good decreases (beef) which not only the decreases the quantity supplied of it but also to a decrease in the by-product (leather).
Correct.
As a higher quantity of good is supplied due to an increase in the price of the good (beef) there is also an increase in the supply of the by-product (leather). The supply curve for the by-product shifts to the right.
On the basis of the following information on the profits to be made from selling either fried chicken pieces or chicken burgers or fried fish, decide whether the supplier should sell fried chicken pieces, chicken burgers or fried fish.
- The profits from selling fried chicken pieces amount to R10 000 per month.
- The profits from selling chicken burgers amount to R12 000 per month.
- The profits from selling fried fish amount to R8 000 per month.
Think again.
Remember the purpose is to maximise profits.
Correct.
Since the profits from selling chicken burgers are the highest, the supplier should be selling chicken burgers.
Think again.
Remember the purpose is to maximise profits.
What do you think would happen to the supply of fried chicken pieces if the price of chicken burgers were to rise and suppliers decided to switch some of their production to the production of chicken burgers?
Think again.
The question is about supply.
Think again.
The question is about supply.
Correct.
The supply of fried chicken pieces would decrease because less would be supplied at each price.
Think again.
More chicken burgers are now produced.
Would the supply curve for fried chicken pieces shift to the left or to the right if suppliers were to decide to produce more chicken burgers and fewer fried chicken pieces?
Think again.
The question is about supply.
Correct.
A leftward shift of the supply curve indicates that at each price less is supplied.