What Is Joint Supply?
Joint supply is an economic term referring to a product or process that can yield two or more outputs. Common examples occur within the livestock industry: cows can be utilized for milk, beef, and hide; sheep can be utilized for meat, milk products, wool, and sheepskin. If the supply of cows increases, so will the joint supply of dairy and beef products.
Understanding Joint Supply
Where joint supply exists, the supply and demand for each product is linked to the others originating from the same source. For example, if demand increases for wool, and sheep farmers therefore raise more animals for wool, there will be a related increase in sheep meat production. This increased production will lead to greater meat supply and potentially lower prices.
Challenges With Joint Supply
In some cases, the proportions of the joint products are nearly fixed, such as with cotton and cottonseed. In such cases, proportions cannot be varied. In other cases, the proportion can be variable. For example, through cross-breeding, it is possible to breed sheep either for wool or for meat. So the quantity of one can be increased at the expense of the other to a degree. Analysts keep a close eye on products in joint supply because investments in one can be significantly impacted by what happens with the other.
Another important issue with joint supply products is the allocation of expenses. Since both products are derived from the same source, it is often difficult to figure out how to divide up expenses. It is not usually feasible to simply split the expenses down the middle in the case of two products, because one product usually sells at a premium to the other. An equal split will artificially deflate or inflate profits on one product or the other. Likewise, randomly allocating expenses will produce artificial results. To handle this on the business side, there are usually pricing matrices that work backwards from the end products to establish costing for reporting purposes.
Joint Supply Versus Joint Demand
Joint demand isn't necessarily related to joint supply. Rather, joint demand happens when demand for two goods is interdependent. For example, printers need ink to function. Similarly, ink cartridges are no use without a printer. Another example could be razors and razor blades, or gasoline and motor oil.
Basically, joint demand is when you need two goods because they work together to provide a benefit for the consumer. If two goods are in joint demand, they will have a high and negative cross elasticity of demand. In other words, a fall in the price of ink may prompt an increase in demand for printers.