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Substitute Goods & Complementary Goods | Interesting Economic Facts

927 views Wait, is this logic right? • Jul 24, 2023
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Slog Reference: Complements, Substitutes, and Commoditizing Your Complement

Description

What are substitute goods that dictate supply and demand in economics? Complements and substitutes make for an interesting realization in economics. You can start understanding the effect of complements and substitutes on your daily life by understanding what complements are, what are substitute goods, how complementary goods and substitute goods are correlated and what you should know about complements and substitutes with supply and demand in economics.

Understand all these things and more interesting economic theories in this episode of the FutureIQ podcast with Navin Kabra and Shrikant Joshi.

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Hope you enjoyed FutureIQ by Navin Kabra and Shrikant Joshi. Do hit us up on Twitter:
@ngkabra http://twitter.com/ngkabra
@shrikant https://twitter.com/shrikant

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Watch other episodes of The FutureIQ podcast: https://www.youtube.com/playlist?list=PLAppTB0r5_TaYueZ0adD42Wiw5X-wTE4v

Chapters:
00:00 Introduction
00:30 Substitutes & complements
04:24 The correlation
05:00 Example 1
06:25 Example 2
08:12 Example 3
12:00 Example 4
14:28 Revision
15:24 Complements
18:34 When it backfires
20:25 Google
24:48 ChatGPT

#futureiq #economics

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Complements, Substitutes, and Commoditizing Your Complement

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Transcript

is going to take my job it looks like so we've already spoken about supply and demand in a previous episode but today we are going to talk about a related concept that will help us basically me determine whether or not chat CPT is going to take my job and if so then how so the concept we are trying to understand today is substitutes and compliments okay let me take an example you're looking really good and you look most you look good on most days those compliments complements complements with an E with an E not an i yeah so uh think of potato versus chicken right okay so chicken is a substitute for potato I mean if you eat
more chicken you're going to eat less potato so like that okay because nobody I know will think of potato or chicken as a substitute for each other if you eat chicken you eat chicken right one chanchi Piti takes your job you are going to be forced to eat potato okay so that GPT is going to take my job it looks like even okay so uh but now consider socks and shoes they are compliments okay you a shoe needs a socks right if you look at some of the people I know it it's not true but I know for all decent people so okay all decent people if you buy shoes you have to buy socks
socks are useless without shoes and shoes should be useless without socks okay but the point is that you have to buy them both together yeah the sales of shoes going up is going to result in sales of stocks going up yeah in that sense yes so let's think of I mean you already know about supply and demand if you don't check out our episode on that yes it is important it's good stuff right I'll put a link in there it's like description I mean one way to think about it is everybody should know this another way to think about it is it's a superpower that you get in understanding how the world works but coming back and
also understanding why you don't get a cab when you need it the most yes so let's try to understand the difference in substitutes and complements as far as supply and demand is concerned Okay so if the demand for chicken increases you're pretty much going to expect that the demand for potato is going to go down yes or which means because yeah they're substitutes correct which means that the price of potatoes will fall okay right yes so the effect of one of your substitutes doing better doing better means that you are going to do worse and that your price is going to fall I mean the price you can command correct whereas with a complement the situation is different I
mean when the demand for a compliment goes up the demand for your stuff also goes up right if I buy more shoes then I'm also going to need socks equivalently yeah I buy more shoes in general no but think of it in terms of business strategy right if Nike goes around advertising shoes and increases right the demand for socks will go up even if the socks company never advertises true right which is why you don't see advertisements for socks on TV it's just shoes shoes socks people don't care right because the compliment is doing all the advertising oh yeah correct so keep that in mind but this makes things kind of tricky also okay how because if
you are going to I mean you're not buying Nikes let's say you're buying cheap shoes right if you're going to spend 500 rupees on shoes you probably have to spend 200 on socks also right yeah which means that you have to budget 700 rupees I mean whatever budget you have for Footwear is going to get split between the different complements song for shoes and for socks right so shoe manufacturers have to feel that pain a little bit as in the more socks cost the less people are going to spend on shoes yeah which makes a bunch of very interesting things which you are going to see in this episode but the simplest one is that if somehow you can cause the price
of socks to go down then the amount of money people are willing to spend on shoes will increase so in a sense it looks like the shoes and the socks the manufacturer of shoes and socks are sort of in a war with each other but not exactly because they are still trying to increase their own uh sales and because their compliments the other sales will also it's a very weird situation it's a very weird situation and let's take some examples slowly please yes first let's take a weird example which is the market situation weird example the manufacturer of both those things are the same okay like imagine a printer oh yeah and ink yes right so you can't use the printer
without ink and you can't use the ink without printer they are perfect complements of each other types and if the same company is making both of them we can play games they sell you a printer for very very cheap why because they know that once you bought a printer you're going to have to buy ink again and again and again so they make the ink expensive and the printer cheap and that's how they hook you expensive and how I mean pound for pound ink is more expensive than champagne probably gold also I don't know but yeah I mean yeah ink is one of the most expensive things in the world yeah by rendering yeah by weight but you also
keep in mind things like this companies what they do is that they have an inbuilt chip into it and the ink just expires even though there is ink but because so much time has passed they don't want you to use the ink it bleeps me off to no end I can't even begin to tell you but this I mean yeah but because the idea compliments here is very clear yeah and the strategy was really started by the razor blade people right they give you razors for almost free because they know that you are going to keep buying blades for them and that is also why Gillette blades do not work with any other razors right they
don't want to become a compliment to somebody else's product yeah this is only our cartridges whether they are printer ink or razors sorry don't go anywhere else there is also another company that does the same thing use only our branded products even though they cost like a bomb even though tiny little wheels cost 400 I don't know who even buys those tiny little wheels I sell you a razor expecting that you're going to buy my blades and then somebody else manufactures blades that are compatible with your razor that person gets all the benefit and I sold you a razor at a loss so I am sitting here with a loss that's stupid right because that blade is a substitute to this blade
right the blades are a complement to the razor but the different blades are substitutes to each other right so if you have a complement for a particular product then it makes sense to also own the rights to manufacturing that uh complement correct if you are selling the complement also then you want to prevent any other substitutes to that complement on the other hand if you are not selling the compliment you want there to be lots of competition in the different complements so that the prices of the complement goes down and people are willing to pay more for your product so I'll give you two great examples please I was trying to think of examples I think I have one but maybe he'll come
up with it yes and I also be validated uh you know 1950s IBM started making computers yes the first desktop and think about all the extra accessories that you need with computers right you need printers and you need type I mean sorry keyboards and this and that right all of these are complements the computer is used without all these other things right yeah I mean IBM 104 in the business of making all these so many different uh accessories peripherals peripheral sorry yeah so what they did was they published specs of you know as long as a peripheral matches these specs it will work with our computers and they wanted as many manufacturers as possible to
manufacture these peripherals so that peripherals become very cheap and the main computer that only IBM makes is this expensive and people are willing to make pay more for it right if the peripherals were expensive you would buy less computers because you wouldn't have the money correct correct later in the 1980s somebody else did the same thing to IBM okay at that time now we have a different set of complements right the computer and the operating system and there are complements to each other right very we had reached a stage where you can't use the computer without an operating system Mainframe was the operating system back then right no but then you know we were started selling computers to individual
people and Mr Bill Gates developed an operating system called Disk Operating System yes so he convinced IBM that they should sell this cooperating system along with the computer all right and the Disk Operating System became very popular yeah Disk Operating System by the way is Dos yes what Microsoft did was they made it compatible with other computers okay and now what is happening is that this Disk Operating System can work with IBM's computers but it can also work with computers made by a whole bunch of other manufacturers so lead Packard and Compact and so on right as a result guess what happened the computer became a commodity when I say something becomes a commodity what
it means is that a large number of people are manufacturing it and there is not much difference between the quality of the different ones right yeah I'll go with the cheapest one I don't care about your computer you claim it is all this special and uh suddenly IBM was forced to compete with all of the other computer manufacturers and the price went down yeah right but there was only one operating system across all of these so now the price of that can go up yeah right Microsoft slowly started increasing the prices of their operating system dos was cheap later came Windows later came other weird things yeah within Windows family but then basically what happened was that
the complement which is the computer that got commoditized and all the money is start became you know went to Microsoft yeah yeah there is Commodities and then somebody else complementing it with kind of a monopolized product which Microsoft did with Windows which IBM did with the computer and then later on what is the next iteration is something that's quite interesting to think about because now the operating systems are also commoditized in a way now so think of the following right I mean I will show you why this concept is so powerful right let's ask the question that in the 1990s IBM was paying people to develop free and open software okay you know you've heard about the open
source software movement yes right now why is IBM paying people to make software which you cannot charge for uh how does that make sense because I don't know I will explain please by the 1990s IBM has realized that they had lost the battle for uh computers computers right so in fact they got out of the making PCS business sold it off Lou gerstner turned around IBM made it a huge successful company again by saying we will give it Services software Services IT services okay now the earliest example of a pivot IT services is a complement to what it's a complement to software yeah right you use software you buy software for your company but you are not smart enough to
use that software properly so you tell IBM please help me to use this software properly please help me to customize it please write scripts on top of this right I bought a database now write the queries for this database okay so these are again now complements software and services on top of the software now guess what IBM is trying to do it is trying to commoditize the software okay how pay open source developers to make software and give it away for free for their operating systems that doesn't matter no that IBM is no longer in the operating system business IBM is just saying whatever software you buy or download for free we will help you use
it properly effectively in your business so they are charging for services on top of software now if you have to pay two thousand dollars for the software and you have a budget of 5000 then only 3000 left for IBM but if you have to pay 0 for the software IBM gets five thousand dollars correct and that explains why IBM paid companies like you know why MySQL is free database I am beginning to see how chat GPT Works in this equation in my context but I am going to be patient and we'll come to that slowly go on right so just just to make sure that all of you have properly understood this let's just go through a few more examples of
substitutes and compliments okay substitutes is simple I mean if you can use this exactly instead of that it's a substitute right so paid version of uh say Microsoft Office versus the free version of LibreOffice or open Office these are substitutes to each other even two paid versions are substitutes right so Google Docs versus Microsoft Office no Google Docs is kind of free most people think of it as free okay fine but no I mean Mac OS versus Windows okay right or Colgate versus pepsodent okay right or iPhone versus an iPhone versus an Android phone correct right all of these are substitutes of each other once you buy a Android phone you don't need an iPhone
but now let us look at examples of compliments yes please and for each complement we will see how this will commoditize the complement helps the business right okay Starbucks and AC and Wi-Fi again before we go into any further examples I want to make clear that we have not been paid by any of these people or paid by the competitions of any of these people so we are not endorsing or dissing any of them these are just examples under fair use but if anyone wants to pay us we are not going to say no of course we are not going to please send money please lots of money we'll take it for free so Starbucks Starbucks and Wi-Fi and AC
okay right you get all you get Wi-Fi and DC at Starbucks free I did what kind of or goes to Starbucks to just sit and drink coffee right nobody does that you go there you see it on your browsing and you do some work on your laptop and of course if there is no AC you would never go to a Starbucks yeah I mean why pay so much but the point is that Wi-Fi and AC are complements to whatever is the service that Starbucks is selling okay but then Starbucks controls the Wi-Fi in the AC so they can offer it for free which means all of the money goes to Starbucks because what happens is
that you spend more time there you buy more coffee except for a few cheapos I know who you are but the rest buy more coffee and Starbucks makes a lot of money okay um Ikea has a brilliant way of doing this right Ikea stores have some of the best food and the cheapest food that you can find yes they do do you know why because when you when you shop on a full stomach you shop better well I mean you go to an Ikea and very likely you're going to get lost because they intentionally make the layout complex okay and you will you'll keep looking for product after product and they're all amazing and think oh my God I need
this one also yeah and then two hours later you are going to leave the shop because you are hungry yes and that's a lost seal instead if you get excellent cheap food in the shop itself we are going to eat and then you're going to go back to shop that is why places like casinos are known to have some of the best food in the business and cheap drinks yes yes so yeah if you go to Las Vegas the hotel room is going to be ridiculously cheap the food is going to be ridiculously cheap and depending on what kind of stuff you are playing the drinks are also going to be either cheap or free
I've never been there but I've heard a lot about comps complementary stuff in this case so yeah yes both I and E so this is two different meanings of complementary here right so uh complementary they're giving it for free yeah but these things are a compliment to your entire casino experience right I mean you're getting drinks you're getting good food you're getting a cheap hotel room so you go and then all the money that you saved on those things you put in the casino but at some point one of these plans has to backfire right I mean you can't keep giving away compliments for free and not you know suffer for it some the money has to come from
somewhere well usually you make up the money in your core product that you are selling correct basically you have corned the person into spending more than they would have yeah if uh the drinks weren't cheap you would have gotten out of there quickly uh but you are sitting there and getting a little more drunk and paying more and so on right but yeah sometimes the strategy can backfire if you didn't think it through carefully okay oh that's why starters in restaurants are so expensive so um in the 1990s Sun Microsystems developed Java okay a programming language right the cross-platform thing yeah yes right and there are there are many many software developers out there right what do you
mean the cross-platform thing it is the very sustenance of Our Lives yes they developed it because they thought okay we are a hardware company we sell hardware and software is a complement to this where they were a hardware company correct yeah so they were selling uh the Java programming language which sits on top of their hardware and their operating system and anybody can use it right so they were giving away Java for free one mistake they made was I mean anybody who studied Java knows that it's a right ones so that it can be the same Java program can be used on any computer what do you think it did to the hardware made it Obsolete and redundant like if I
can run on any computer then why do you need it but no no not absolutely it made it a commodity right you don't need uh I mean sun was high-end expensive machines right very reliable and all that but if Java is going to work on any random Hardware why do you need expensive machines for that so they managed to commoditize themselves and shot themselves in the foot guess what happened to Sun later they went out of business right if you hadn't heard about that until now welcome out of under the rock that you've been living in all this while we've gone through a pandemic for three years and lots of stuff has happened go catch up by watching our
previous episodes right specifically the one where we spoke about scientific breakthrough there is one way in which com some companies use it extremely effectively okay so if you have ever looked at the price of teeny tiny little things Apple peripherals right like what do you think I was referring to when I said Wheels 400 Wheels I don't know why those Wheels there are 400 wheels for the tower Mac whatever it is called a not an apple Fanboy but you know 400 wheel machine cut Wheels why yeah so yeah and pretty much everything related to an iPhone is extremely expensive because it's a compliment what are you going to do I mean you do need things in your ear
to hear right so you're going to pay a lot for it also but one thing they did better than sun is guess why none of these Apple products work with anything else right why does an iPhone doesn't work with the random things you can buy off the street and why doesn't a random Apple peripheral work with my Android phone the reason is because they don't want to commoditize themselves correct right they learn from the mistakes of sun and they learn from the smartness of IBM right in more ways than one right so as in you know own everything make sure it is not interoperable make sure nothing here can be commoditized and then you can charge
whatever you want as long as the overall experience is good enough right they made a world Garden ecosystem and they are thriving inside it Google by the way has a completely opposite strategy okay okay what Google does is that their Core Business is search now can you name what all things are complements to search everything that you do on the Internet is a compliment to search because you need search for everything exactly so one for example is that uh you need a device right that's why Google got into the business of making phones that are much cheaper than Apple phones Android right you need a browser that's why Google got into uh making Chrome actually Google's primary
business is not search it's the ad business on insertion right so ad business means you need data so anything that generates data is a complement to that service that they provide or yeah to that business that they have I mean the your internet the more social fiber right Google is making Google also pays for a lot of initiatives to digitize information right I mean if if you have some like old data right like from letters from the peshwa era and you want to put it online as long as some unique data go apply to Google they'll give you free money to put it online right why because when are you going to search for it yes Google box because content is a
compliment to Google's main business right which is why Google ads created Blogspot and blogger in the old days and made it free I'm beginning to see how chat GPT applies in this scenario specifically to me and I am me personally I'm beginning to think I can be a compliment to charge GPT or chat GPT more likely can be a compliment to me and what I do but there are some instances where chat Deputy is going to be a substitute in fact we did an episode take a look at it uh about you know how to think about AI taking your job and the most important thing we explained there it is the the thumbnail for the episode currently looks like a
Pac-Man and the Pac-Man is trying to eat me okay no that's not what it looks like I mean we know that's the reality but we don't want to say it okay yeah the important thing we said was that don't think of a job as one unit think of a job as something that involves 10 different tasks right and some of those tasks charge GPT can do some of those tasks it cannot do now think of that in terms of compliments and substitutes okay so the tasks that it can do chat GPT is a substitute for you correct the things that it cannot do charge GPT is a compliment for you okay now your strategy has to be of course I
mean basically what has happened is that wherever chat GPT is a compliment your complement has become commoditized right I mean anybody has access to check GPT and it is ridiculously cheap which means that the price cost of that has gone to zero correct which means that assuming that the end product is still useful to the customers they now have more money to spend on the parts that have not been commoditized the parts that you are good at right so here is what you will probably need to do you will sit down you'll need to sit down and figure out what are the tasks that you do in your job and against each of the tasks you
need to figure out whether chat GPT or an equivalent AI can replace that task and substitute that task so is that task the chicken and Chachi PT the potato or is that more like a compliment to it as in what chat GPT does you can build on top of it or charity can't do that at the moment so in my case for example as a voice actor um I don't have to worry about writing the basic scripts what I need to what I can do is use stat GPT to write a basic script then use my expertise to tweak that script chargpt can voice can generate there are artificial voice generators but it can't put an emotion
at the moment so until scientific can do that or any other AI can do that I think my job as a voice performer voice actor voice tablet is what you are saying is that if voice or YouTube videos was my job then I am out of a job but your value will increase because I don't do the emotion and all of that but you do good thing I'd have other things to do but yes this is precisely right yeah but here is a question I mean you make a list of tasks and then against that you have to put can chat GPT do this how do you figure that out by asking chat GPT Church Deputy can you do this in fact I
think the most important thing you can to understand the capabilities of chat GPT and let me tell you they are far ahead of what you think right the only way to discover whether charger PT can how much of your job charging PT can do is to actually try to do your entire job using chat GPT okay do this the ones who don't do this are the ones who are likely to get replaced whereas the ones who do this will slowly over time figure out that these these these things chargpt did very well whereas the rest of them I had to tweak yeah make sure that you get really good at the other stuff yeah right and in in
some cases there will be situations where chat GPT does say 90 percent of what you do and you are left with only 10 percent that means your job is under threat that means you need to either upskill or reskill yourself within the domain of your job or in something else entirely and there will be some unfortunate people for whom that 90 might even be 100 and those are the ones who will definitely get substituted I'm sorry to sound like a doomsayer and whatnot but I mean in the previous episode we did mention that most likely I feel that chat GPT is going to increase the number of jobs that are available but they will not be the same
jobs they will not be the same skills and if you there will be a transition period during which people who are not able to upskill or change their skills are in trouble we are going to see a lot of upheaval it is going to be a tough time that is why I am saying get working right now figure out what chat GPT can do figure out what your uh unique talent is and start building on that start getting better and do not say this is not my job or I am not an ex whatever it is try to learn things that chat chipity cannot do if you think you are not an ex you will soon be an ex yes
on that bit of word play I think this is a good time to call this episode and end srikant Naveen thank you future IQ yeah thank you for watching till the end if you like this episode check out these others you might like them also and please share with your friends I'm sure they will also like these thank you