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GARY M. GALLES, PEPPERDINE UNIVERSITY PHILIP E. GRAVES, UNIVERSITY OF COLORADO ROBERT L. SEXTON, PEPPERDINE UNIVERSITY Productive Complements: Too Often.

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Presentation on theme: "GARY M. GALLES, PEPPERDINE UNIVERSITY PHILIP E. GRAVES, UNIVERSITY OF COLORADO ROBERT L. SEXTON, PEPPERDINE UNIVERSITY Productive Complements: Too Often."— Presentation transcript:

1 GARY M. GALLES, PEPPERDINE UNIVERSITY PHILIP E. GRAVES, UNIVERSITY OF COLORADO ROBERT L. SEXTON, PEPPERDINE UNIVERSITY Productive Complements: Too Often Neglected In The Principles Course?

2 Productive Complements Both-and relationships on the supply side Key issue - the opportunity cost of the joint production process versus the sum of the values of the outputs Beef and hides

3 Neglect Of Productive Complements Since most principles texts do not deal with productive complements, most economics students are never exposed to the topic. Exceptions include: Krugman/Wells - oil and natural gas; Bade/Parkin - skim milk and cream.

4 Alfred Marshall On Productive Complements Marshall had a substantial discussion of productive complements. He used four examples: beef/hides; wheat/wheat straw; wool/mutton; and cotton/cottonseed oil. Supply price of a productive complement equals the joint production cost minus the sum of the prices of the other joint products.

5 Reasons To Discuss Productive Complements Symmetry Complementary (both-and) relationships on the demand side are symmetrical with complements on the supply side. Productive substitutes (opportunity cost of owned inputs) are discussed in texts; “complementary” discussion of productive complements is also warranted.

6 Reasons To Discuss Productive Complements Reinforcement Understanding both-and incentive stories on the supply side reinforces understanding of both-and stories on the demand side. Discussing productive complements reinforces student understanding of supply and demand as a set of interrelated incentive stories.

7 Reasons To Discuss Productive Complements Entrepreneurship Productive complements offer concrete examples of entrepreneurship - finding valuable uses for other outputs of a joint production process - in search of profits. Examples include particle board and lumber, as well as naptha, petroleum jelly, insecticide and other oil refinery products.

8 Reasons To Discuss Productive Complements Illustrating the invisible hand When entrepreneurship increases the value of a productive complement, it increases the supply curves of the other joint products, which lowers prices, benefitting those consumers. The increase in consumer surplus in the related markets is a measure of unintended gains for others.

9 Reasons To Discuss Productive Complements Illustrating positive environmental effects of capitalism Entrepreneurial incentives for developing the value of productive complements make firms act as if they care about the environment, whether they do or not, especially in turning waste that must be disposed into valuable products.

10 Reasons To Discuss Productive Complements Productive complements introduce real world ambiguity about what “the” cost of a product is. With productive complements (steaks and roasts), there is no “correct” way to allocate costs between them. Productive complements allow for interesting illustrations of “creative” accounting in allocating costs, as with hit TV shows.

11 Reasons To Discuss Productive Complements Illustrating market interactions Productive complements are often an important part of cross-market communication. If productive complements are an important mechanism in a series of incentive stories connecting different markets, but are not discussed, substantial predictive power is thrown away. What would an increase in tastes for leather couches do to the profits of chicken producers?

12 Reasons To Discuss Productive Complements Joint products with bads Productive complements help students understand the analysis of externalities, with joint production of pollution. If pollution of some form generally accompanies production, then joint production is the general case, not a special case, which most texts implicitly seem to assume.

13 Reasons To Discuss Productive Complements Introducing the logic of public goods As Harold Demsetz pointed out, the vertical summation of the values placed on a public good is the same technique as adding up the values placed on the different outputs from a joint production process.

14 Reasons To Discuss Productive Complements Discussing various possible bundles of private goods and impure public goods People can buy coffee or they can buy coffee plus rainforest conservation or other environmental benefits in various bundles.

15 Reasons To Discuss Productive Complements Productive complements provide excellent stories to illustrate the power of economic incentives Honey and pollination services Productive complements and Standard Oil Furnace filters and bottle caps No such thing as a vegan

16 Productive Complements


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