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