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The question is: explain the change in the market for skim milk, if demand for ice cream rises.

I'd say these two are unrelated in consumption (saying they're substitutes is kind of stretching it), but complements in production: you extract the cream from whole milk to make ice cream, and the rest becomes skim milk. (Right? Please correct me if I'm wrong.)

Based on this assumption, my answer is that the supply for skim milk will increase (the supply curve shifts right). As demand for ice cream rises, the demand curve for it shifts to the right, and assuming the supply curve for it remains still, this shift will increase both the price and quantity of ice cream. In turn, as ice cream prices rise, producers make more of it, and thus more skim milk.

The thing is, my textbook doesn't describe demand for a complement in production as a factor that shifts the supply curve. So I was wondering, is the reasoning above valid? Thanks.

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Sounds pretty good to me. I think it would be more coherent to change the way you say this:

As demand for ice cream rises, the demand curve for it shifts to the right, and assuming the supply curve for it remains still, this shift will increase both the price and quantity of ice cream. In turn, as ice cream prices rise, producers make more of it, and thus more skim milk.

I would change it to say this:

As demand for ice cream rises, the demand curve for it shifts to the right, and assuming the supply curve for it remains still, this shift will increase both the price and quantity of ice cream. In turn, the increase in production will cause a upward shift in the supply of skim milk because skim milk and ice cream are "complements in production."

I make this change because you when you say that "this shift will increase both the price and quantity of ice cream" you have already said that the production of ice cream has increased (it increased along the supply curve).

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  • $\begingroup$ Jmbejara - Would you call these complements in production? I thought that term was used for two things produced simultaneously from the same resource. That is, that producing one triggered the production of the other. For example, consider the sawdust (collected and packaged for sale) that is produced when a lumber mill converts raw timber into building material. I thought the final timber product and the sawdust would be complements in production. Would we not just refer to skim milk as an input here? $\endgroup$ – 123 Jan 24 '15 at 18:58
  • $\begingroup$ The OP made this point. When you get milk from the cow and you remove the cream (used to make ice cream) you are left with the skim milk. Skim milk is not an input. It's a by-product of producing cream. $\endgroup$ – jmbejara Jan 24 '15 at 20:43
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    $\begingroup$ Oh man...I blew past that thing about whole milk when I skimmed the question. $\endgroup$ – 123 Jan 24 '15 at 21:30

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