Question

Give an example of how resources complement each other and how they are substitute

to each other? What drives the decision for a country to substitute one resource for

Another?

Answer 1

1.

Any two resources complement one another if the rise in the price of one resource decreases the demand for the other resource and vice versa.

This is because complementary goods or resources have negative cross Price elasticity of demand.

Any two resources are called the substitutes of each other if the rise in the price of one resource. Increases the demand for the other resource and vice versa.

This is because, substitute goods or resources have positive cross price elasticity of demand.

2.

Only when a country has an abundant resource or factor of production, it will invest in the production of any good or service with that resource. Otherwise it will search for another resource which can be used up as a substitute.

For example :- Countries usually consider capital and labour resources as substitutes of each other. If they find shortages in capital they will substitute capital with labour instead of investing on various capital goods.