Question

Explain how the supply of a commodity is affected by the prices of other related commodities. Give suitable examples.

Answer 1

1. Substitutes in Production: Substitutes in production are goods that can be produced using the same resources. An increase in the price of one substitute good may lead to a decrease in the supply of another good, as producers may allocate more resources to the production of the higher-priced substitute. For example, consider a farmer who can grow wheat or corn on the same land. If the price of wheat rises, the farmer may decide to grow more wheat and less corn because wheat is now more profitable. As a result, the supply of corn decreases due to the increase in the price of wheat. Here, wheat and corn are substitutes in production, and the price increase of one leads to a reduced supply of the other.
2. Complements in Production: Complements in production are goods that are produced together. Increasing the price of one complementary good may increase the supply of the other, as producing more of one good naturally leads to more of the other. For example, a dairy farm produces both milk and cream. If the price of cream increases, the farm may increase milk production because cream is a by-product of milk production. As a result, the milk supply may also increase, even though the price has not changed. In this case, milk and cream are complements in production, and an increase in the price of one leads to an increased supply of the other.