Joint supply

What Is Joint Supply?

Joint supply is an economic concept within microeconomics where the production of one good inevitably results in the production of another good. These goods are by-products of the same production process, meaning an increase in the supply of one good will naturally lead to an increase in the supply of the other. The decision to produce one item directly affects the availability of the other, often due to shared raw materials or manufacturing steps. This relationship is a fundamental aspect of how certain industries manage their supply and overall cost of production.

History and Origin

The concept of joint supply has been recognized in economic theory for centuries, as observed in agricultural and industrial processes. Early economists noted how certain outputs were inherently linked, such as wool and mutton from sheep, or the various parts of a slaughtered animal. In the modern industrial era, a prominent example of joint supply emerged with the rise of the petroleum industry. As crude oil is refined, it yields multiple products like gasoline, diesel, and jet fuel. The U.S. Energy Information Administration (EIA) regularly publishes data on refinery yields, illustrating the proportional output of these interconnected products from crude oil processing.⁶ This intrinsic link means that an increase in the refining of crude oil to meet demand for one product, such as gasoline, will concurrently increase the supply of jet fuel and other distillates.

Key Takeaways

• Joint supply occurs when producing one good automatically yields another.
• The goods are inseparable outputs of a single production process.
• An increase in the supply of one joint product leads to an increase in the supply of the other.
• This relationship impacts market dynamics and pricing strategy for both goods.
• Producers must manage demand for all joint products to optimize revenue.

Interpreting Joint Supply

Understanding joint supply is crucial for industries where it is prevalent, as it directly influences resource allocation and production decisions. Producers engaged in joint supply must consider the demand for all their co-products, not just the primary one. For instance, a refiner converting crude oil into various fuels cannot simply increase gasoline output without also increasing the supply of jet fuel and other petroleum products. This necessitates a balancing act, where the profitability of each joint product contributes to the overall profit maximization of the operation. The relative prices and market conditions for each output dictate how producers might adjust their processes within the constraints of their technology.

Hypothetical Example

Consider a hypothetical cattle ranching operation. The primary goal might be to produce beef for meat consumption. However, the cattle also yield hides, which are used to make leather products. This is a classic case of joint supply.

Let's assume the ranch increases its cattle herd by 10% to meet a growing demand for beef. As a result of slaughtering more cattle, the supply of beef to the market increases. Simultaneously, the supply of hides, a by-product of the same process, will also increase by approximately 10%. The rancher cannot produce more beef without also generating more hides. The U.S. Department of Agriculture's Economic Research Service (ERS) collects extensive data on livestock and meat production, illustrating the intertwined nature of these outputs.⁵ The rancher must then find markets for both the beef and the hides, and the prices received for each will contribute to the operation's overall profitability.

Practical Applications

Joint supply is a significant factor in several real-world industries:

• Petroleum Refining: Crude oil is the input, and the output includes a range of products like gasoline, diesel, kerosene, and jet fuel. When refiners increase the production of gasoline, they inherently increase the supply of jet fuel. The U.S. Energy Information Administration (EIA) monitors refinery yields, showing the proportions of these different fuels produced.⁴ Adjustments to output are influenced by changes in demand for specific products. For example, a surge in air travel could increase demand for jet fuel, leading refiners to shift their yields, which could in turn affect the supply and price of other fuels like gasoline or distillate fuel oil.³ A Reuters report noted how jet fuel prices rose due to increased demand and refinery outages, underscoring the interplay of supply factors.²
• Agriculture: Beyond meat and hides, processing grains can yield various food products and animal feed. The decision to grow a certain crop often results in both a primary product and secondary co-products.
• Logging and Timber: When trees are harvested, they yield various grades of lumber, pulpwood, and wood chips. Increasing the output of high-grade lumber will naturally increase the supply of lower-grade wood products.
• Chemical Industry: Many chemical manufacturing processes produce multiple compounds simultaneously. For instance, the cracking of hydrocarbons yields different chemical precursors.

In these sectors, producers must carefully manage the sales and market equilibrium for all joint products to maximize their producer surplus.

Limitations and Criticisms

While joint supply describes a fundamental production relationship, its primary limitation lies in the fact that producers have limited flexibility to alter the proportions of the jointly supplied goods. For example, an oil refinery can adjust its processes to slightly favor the production of more gasoline or more jet fuel, but it cannot produce gasoline without also producing other crude oil derivatives. This inherent linkage means that if the demand for one joint product falls significantly while the demand for another remains high, the producer may face challenges with inventory management or pricing. They might have to sell the less demanded product at a lower price or find alternative uses, which could impact overall profitability.

Furthermore, the concept highlights the interconnectedness of markets. A sudden shift in elasticity for one product can indirectly affect the market for its joint product. For example, if there's a strong economic downturn that drastically reduces the demand for beef, the associated supply of hides will also increase, potentially leading to a surplus in the hide market and downward pressure on hide prices, even if demand for leather goods was stable. Historically, changes in the livestock industry, such as reduced cattle supplies, have had significant impacts on prices due to these joint supply relationships.¹ This interdependence means that economic analysis must consider the entire production chain rather than isolating individual products when joint supply is present.

Joint Supply vs. Competitive Supply

Joint supply and competitive supply represent opposing relationships in production.

• Joint Supply: As discussed, this occurs when an increase in the production of one good causes an increase in the production of another good because they are by-products of the same process. Examples include crude oil and its various refined products, or beef and hides from cattle. The goods are produced together.
• Competitive Supply: This refers to a situation where an increase in the production of one good reduces the ability to produce another good because they compete for the same scarce resources. For example, a farmer has a fixed amount of land. If they decide to plant more corn, they must plant less soybeans. Corn and soybeans are in competitive supply for that specific plot of land. Another example might involve a factory that can produce either cars or trucks using the same assembly line; increasing car production means less capacity for trucks. The goods compete for available scarcity of inputs.

The key distinction lies in the outcome of increased production: joint supply results in more of both goods, while competitive supply results in more of one and less of the other, given finite resources and marginal cost considerations.

FAQs

What is an example of joint supply?

A classic example is the refining of crude oil, which simultaneously produces gasoline, diesel, and jet fuel. When more crude oil is refined to make more gasoline, more jet fuel is also produced as an inherent part of the process.

How does joint supply affect prices?

Joint supply affects prices because the supply of one good is tied to the supply of its co-product. If demand for one product rises, encouraging increased overall production, the increased supply of the joint product can put downward pressure on its price, assuming its demand doesn't rise proportionally. Conversely, a fall in demand for one product might lead to reduced overall production, making the joint product scarcer and potentially increasing its price.

Is joint supply related to demand?

While joint supply describes a relationship on the production side (how goods are supplied), it is significantly influenced by and impacts demand for the individual products. Producers manage their output based on the collective demand for all joint products to ensure efficient resource utilization and profitability.