“Off the Cob” and On the Market

Season 6, Episode 10: Complementary and substitute goods in production can sometimes be tricky to teach, since there are subtle differences from complements and substitutes in consumption. This clip provides an excellent example of both. Cameron Sheldrake finds that the quantity of corn he supplies on the market often exceeds the quantity demanded. In the past, this surplus corn would be discarded, but Cameron has discovered he can use it to make sweet corn tortilla chips. This is a classic example of complementary goods in production. Cameron produces his regular crop, and with the byproduct (in this case, the leftover corn), he is able to produce another good. However, if demand for his tortilla chips increases, it may become more profitable to use more than just the surplus corn to make chips. In that case, he will decrease his supply of corn for his traditional market and increase his supply for the chips. At this point, they become substitute goods in production. Another determinant of supply is the cost of inputs. Cameron mentions that the cost of sweet corn used in his chips is twenty times more than the cost of conventional corn flour used in regular chips. Perhaps this is why we don’t see others supplying this product. This price gets passed on to the consumer. Many consumers will consider this product to be a substitute for regular tortilla chips. With a price of $3.49 per single serving bag vs. $0.99 for regular chips, demand won’t be increasing for this product unless they can differentiate it substantially. Take the discussion to the next level, and ask students for a plausible explanation for why Cameron doesn’t lower the price of his corn to eliminate the surplus. (Hint: think about total revenue and price elasticity of demand.)