Let's suppose there is a company that can produce two goods: A or B. The price of good B increases. This will result in an increase in the quantity supplied of good B, but does this result in a decrease in supply of good A? Does quantity supplied of good B affect the supply of good A?
3 Answers
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There is no clear answer, it depends on various factors such as constraints that firm faces and production function and so on.
For example, suppose we have two factors labor L and capital K. Firm has 100 units of both. Then suppose production function for product A is $A= \sqrt{K}$ and $B=\sqrt{L}$.
In this case producing less of output A does not allow firm to produce more of output B and vice versa.
If A and B have production function given by $A= \sqrt{K}\sqrt{L}$ and $B=K^{0.2}L^{0.7}$, and if the firm hits its resource constraint of 100 units of capital and labor, then firm can only produce more of A if it produces less of B.
A priori we cannot really say what will happen without first analyzing some particular scenario.
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I cannot comment, but the answer above appears to be wrong.
Firms maximize profits according to the marginal principle. That is, firm would produce something as long as P > MC and stop when P = MC. This principle should be applied across each good separately. If the price of B goes up (provided nothing happens to the MC curves for both A and B) then the firm should respond by producing more of B by hiring more factors of production (assuming that the factor markets are competitive). The exact shapes of production function is of secondary importance to this question (that could matter but it does not address the question asked.)
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$\begingroup$ This is not correct. You are assuming there is infinite amount of labor and capital out there. As mentioned in my answer that is not necessarily the case. If there is only 10 units of capital out there and firm has production function Q=K then production will cease at Q=10 even if at Q=10 MR> MC $\endgroup$– 1muflon1 ♦Oct 9 at 22:50
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$\begingroup$ "You are assuming there is infinite amount of labor and capital out there". This is an implication of competitive factor markets, which is the most reasonable (and very common) assumption to address the question above. Your assumption of not being able to hire any additional factors of production is way more unrealistic. You also impose specific forms of production function to answer a very general price theory question, which is very misleading. $\endgroup$– IPIIOct 9 at 23:05
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$\begingroup$ 1. Empirically not all factor markets are competitive such as labor market, and factor shortages can occur. There isn't anything unrealistic about firm not being able to fill position. In fact that is extremely common especially for more specialized positions in many countries. 2. I am not sure if you ever read graduate level text on microeconomic theory, but there is a plethora of models that deviate from assuming competitive factor markets. 3. General question requires general answer. 4. Those production functions are just examples illustrating the answer depends on parameters of problem $\endgroup$– 1muflon1 ♦Oct 9 at 23:36
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$\begingroup$ Your 3. is exactly my point, give a general answer before going to a “grad-level text” specific models. Those are the extensions. The question is about a firm producing 2 goods, and you are bringing in the inability to hire a worker with specific skills. Ps I have read enough grad-level texts having a phd in economics and teaching for years. $\endgroup$– IPIIOct 9 at 23:57
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$\begingroup$ @ilyywa The "reasonable assumption" to make about the company in the question is that they have an infinite amount of labor? "we cannot really say what will happen" seems like a pretty general answer to me. $\endgroup$– GiskardOct 10 at 4:44
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There are certainly situations where an increase in the price of B will cause a change in the supply of A. As an example, whey (A) is a leftover from cheese (B) production. If the price of cheese goes up, then the increase in the production of cheese will result in an increase in the production of whey.
Unlike the currently accepted answer, the connection is not due to a constraint on the inputs available. Instead it is a result of the goods being produced jointly.
