Digital Strategy and Markets · Week 1

Substitutes and complements: can one input replace the other?

A service desk resolves tickets with two inputs: worker hours and AI capacity. The blue curve joins every input mix that resolves the day's tickets. Its shape answers one question: can you buy your way out of a missing input? One slider bends the shape, from inputs that must be used together to inputs that replace each other. The other slider changes the price of AI relative to a worker hour. Watch the cheapest mix respond.

0 = they must be used together (L-shape). 1 = they trade off smoothly. High = one can stand in for the other (straight line).
Baseline = 1.00. Lower it to make AI cheaper, the move that Moore's law made for forty years.
Cheapest mix: AI capacity
10.00
 
Cheapest mix: worker hours
10.00
 
Total cost per day
20.00
 
When the two inputs must be used together, the curve bends into an L, and making AI cheaper barely changes the mix, because the firm has nothing to reallocate. When the inputs can replace each other, the curve flattens, and the same price cut moves the mix strongly toward AI. How much a firm responds to a price shock therefore depends on how replaceable its inputs are.