Substitute and Complementary Factors
Just as some goods are substitutes and complementary goods for others, similarly substitute and complementary relationship can be found to exist among factors of production. We have said above that if a factor X becomes cheaper relatively to factor Y, there will be a tendency to buy more of X and less of Y. This in effect means that factor X has been substituted for factor Y. In this case factors X and Y are substitutes of each other. Two factors X and Y arc said to be substitutes when the substitution effect on Y of a change in the price of X is greater than the output erred on it. This is so because the negative substitution effect is greater than the positive output (or expansion) effect.
But when the marginal rate of technical substitution declines very rapidly (i.e.• when the equal product curves are highly convex to the origin, the substitution effect will be very small. In this case, the output effect of the fall in price on the purchase of Y is greater thcfuthe substitution effect. Hence .the net effect of the fall in price of X will be to increase the quantity purchased of Y also. In this case, both factors X and Y will be purchased in greater quantities. This means they are complements of one. another. The two factors arc said to be complementary to each other when the output effect of a Callin the price of one factor is ~rl’atcr than the substitution effect,